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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From ___________ to ___________ 000-50511
Commission File Number UNITED AMERICA INDEMNITY, LTD.  Cayman Islands(State or other jurisdiction
    
    98-0417107of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 WALKER HOUSE, 87 MARY STREET
P.O. BOX 908GT
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
(Address of principal executive office including zip code) (345) 949-0100
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). YES þ NO o As of May 6, 2005, the registrant had outstanding 23,679,789 Class A Common Shares and 12,687,500
Class B Common Shares.




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TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATION (1)Item 1. Financial Statements:Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations Quarter Ended March 31, 2005
    
    
    2Consolidated Statements of Comprehensive Income Quarter Ended March 31, 2005
    
    
    3Consolidated Statements of Changes in Shareholders Equity
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    47Item 4. Submission of Matters to a Vote of Security Holders
    
    
    47Item 6. Exhibits
    
    
    48Signatures
    
    
    49CERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906
    (1)
    
    On January 24, 2005, we completed our merger with Penn-America Group, Inc., as well
as our acquisition of Penn Independent Corporation. In connection with the
transactions, our shareholders approved a change in our name from United National
Group, Ltd. to United America Indemnity, Ltd. Under purchase accounting rules, our results of operations for the quarter ended
March 31, 2005 reflect the addition of Penn-America Group, Inc. and Penn Independent
Corporation from January 25, 2005 through March 31, 2005. All prior period results
reflect only the results of operations of United America Indemnity. As used in this quarterly report, unless the context requires otherwise, 1) United America
Indemnity, we, us, and our refer to United America Indemnity, Ltd., an exempted company
incorporated with limited liability under the laws of the Cayman Islands, and its U.S. and Non-U.S.
Subsidiaries; 2) our U.S. Subsidiaries refers to U.N. Holdings II, Inc., U.N. Holdings Inc., Wind
River Investment Corporation, American Insurance Service, Inc., Emerald Insurance Company,
Penn-America Group, Inc., our U.S. Insurance Operations and our Agency Operations; 3) our U.S.
Insurance Operations refers to the insurance and related operations conducted by American
Insurance Service, Inc.s subsidiaries, including American Insurance Adjustment Agency, Inc.,
International Underwriters, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance
Companies and the Penn-America Insurance Companies; 4) the United National Insurance Companies
refers to the insurance and related operations conducted by United National Insurance Company and
its subsidiaries, including Diamond State Insurance Company, United National Casualty Insurance
Company, and United National Specialty Insurance Company; 5) the Penn-America Insurance Companies
refers to the insurance and related operations of Penn-America Insurance Company, Penn-Star
Insurance Company, and Penn-Patriot Insurance Company; 6) the Agency Operations refers to Penn
Independent Corporation, PIC Holdings, Inc., Penn Independent Financial Services, Inc., Penn
Oceanic Insurance Co., Ltd. (Barbados), Residential Underwriting Agency, Inc., Stratus Insurance
Services, Inc., Stratus Web Builder, Inc., Apex Insurance Agency, Inc., APEX Insurance Services of
Illinois, Inc., Summit Risk Services, Inc., Delaware Valley Underwriting Agency, Inc. (DVUA),
DVUA Pittsburgh, Inc., DVUA Massachusetts, Inc., DVUA of New York, Inc., DVUA of New Jersey, Inc.,
DVUA West Virginia, Inc., DVUA North Carolina, Inc., DVUA of Ohio, Inc., DVUA South Carolina, Inc.,
and




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DVUA Virginia, Inc.; 7) our Non-U.S. Subsidiaries refers to our Non-U.S. Insurance Operations,
U.A.I. (Gibraltar) Limited, the Luxembourg Companies, Wind River Services, Ltd., and Loyalty
Insurance Company, Inc.; 8) our Non-U.S. Insurance Operations refers to the insurance and
reinsurance and related operations of Wind River Barbados and Wind River Bermuda; 9) Wind River
Barbados refers to Wind River Insurance Company (Barbados), Ltd.; 10) Wind River Bermuda refers
to Wind River Insurance Company, Ltd.; 11) the Luxembourg Companies refers to U.A.I. (Luxembourg)
I S.ar.l., U.A.I. (Luxembourg) II S.ar.l., U.A.I. (Luxembourg) III S.ar.l., U.A.I. (Luxembourg) IV
S.ar.l., U.A.I. (Luxembourg) Investment S.ar.l., and Wind River (Luxembourg) S.ar.l.; 12) United
National Group refers to our U.S. Insurance Operations, Emerald Insurance Company, and Loyalty
Insurance Company; 13) the Statutory Trusts refers to United National Group Capital Trust I,
United National Group Capital Statutory Trust II, Penn-America Statutory Trust I and Penn-America
Statutory Trust II; 14) Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated
investment funds; and 15) $ or dollars refers to U.S. dollars.




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements UNITED AMERICA INDEMNITY, LTD. 
 Consolidated Balance Sheets  (Unaudited)March 31, 2005
    
    
    December 31, 2004ASSETSBonds:Available for sale securities, at fair value
(amortized cost: $1,042,762 and $575,298)
    
    $
    1,038,765
    
    
    $
    585,385Preferred shares:Available for sale securities, at fair value (cost: $8,160 and $4,804)
    
    
    8,056
    
    
    
    5,112Common shares:Available for sale securities, at fair value (cost: $53,046 and $34,004)
    
    
    56,645
    
    
    
    37,894Other invested assets
    
    
    52,051
    
    
    
    53,756Total investments
    
    
    1,155,517
    
    
    
    682,147Cash and cash equivalents
    
    
    119,219
    
    
    
    242,123Accounts receivable
    
    
    20,081
    
    
    
    Agents balances, net
    
    
    68,991
    
    
    
    47,132Reinsurance receivables, net
    
    
    1,530,550
    
    
    
    1,531,863Accrued investment income
    
    
    12,562
    
    
    
    7,141Federal income taxes receivable
    
    
    199
    
    
    
    Deferred federal income taxes, net
    
    
    19,170
    
    
    
    28,372Deferred acquisition costs, net
    
    
    38,395
    
    
    
    29,735Goodwill
    
    
    98,123
    
    
    
    Prepaid reinsurance premiums
    
    
    47,000
    
    
    
    42,623Other assets
    
    
    60,695
    
    
    
    14,801Total assets
    
    $
    3,170,502
    
    
    $
    2,625,937LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    2,085,199
    
    
    $
    1,876,510Unearned premiums
    
    
    240,971
    
    
    
    152,166Federal income taxes payable
    
    
    
    
    
    
    1,943Amounts held for the account of others
    
    
    16,066
    
    
    
    10,234Ceded balances payable
    
    
    24,478
    
    
    
    22,698Insurance premium payable
    
    
    26,897
    
    
    
    Payable for securities
    
    
    12,638
    
    
    
    Senior notes payable to related party
    
    
    72,848
    
    
    
    72,848Junior subordinated debentures
    
    
    61,857
    
    
    
    30,929Notes and loans payable
    
    
    5,010
    
    
    
    Other liabilities
    
    
    39,095
    
    
    
    26,056Total liabilities
    
    
    2,585,059
    
    
    
    2,193,384Commitments and contingencies (Note 11)
    
    
    
    
    
    
    Minority interest
    
    
    395
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000 common
shares authorized, 23,666,898 and 15,585,653 Class A
common shares issued and outstanding, respectively,
and 12,687,500 Class B common shares issued and
outstanding
    
    
    4
    
    
    
    3Preferred shares, $0.0001 par value, 100,000,000
shares authorized, none issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    501,200
    
    
    
    356,725Accumulated other comprehensive income
    
    
    7,935
    
    
    
    15,507Retained earnings
    
    
    75,909
    
    
    
    60,318Total shareholders equity
    
    
    585,048
    
    
    
    432,553Total liabilities and shareholders equity
    
    $
    3,170,502
    
    
    $
    2,625,937
 See accompanying notes to consolidated financial statements. 1




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UNITED AMERICA INDEMNITY, LTD. 
 Consolidated Statements of Operations  Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004Revenues:Gross premiums written
    
    $
    135,460
    
    
    $
    117,938Net premiums written
    
    $
    109,521
    
    
    $
    58,617Net premiums earned
    
    $
    102,112
    
    
    $
    45,422Agency commission and fee revenues
    
    
    6,252
    
    
    
    Net investment income
    
    
    11,868
    
    
    
    4,210Net realized investment losses
    
    
    (616
    )
    
    
    (70
    )Total revenues
    
    
    119,616
    
    
    
    49,562Losses and Expenses:Net losses and loss adjustment expenses
    
    
    63,597
    
    
    
    29,270Acquisition costs and other underwriting expenses
    
    
    31,115
    
    
    
    11,324Agency commission and operating expenses
    
    
    6,919
    
    
    
    Corporate and other operating expenses
    
    
    1,966
    
    
    
    1,470Interest expense
    
    
    1,916
    
    
    
    1,315Income before income taxes
    
    
    14,103
    
    
    
    6,183Income tax expense (benefit)
    
    
    81
    
    
    
    (656
    )Net income before minority interest and equity in net income of partnerships
    
    
    14,022
    
    
    
    6,839Minority interest, net of taxes
    
    
    32
    
    
    
    Equity in net income of partnerships
    
    
    111
    
    
    
    579Net income before extraordinary gain
    
    
    14,165
    
    
    
    7,418Extraordinary gain
    
    
    1,426
    
    
    
    Net income
    
    $
    15,591
    
    
    $
    7,418Per share data:Net income before extraordinary gain:Basic
    
    $
    0.42
    
    
    $
    0.26Diluted
    
    $
    0.41
    
    
    $
    0.26Extraordinary gain:Basic
    
    $
    0.04
    
    
    $
    Diluted
    
    $
    0.04
    
    
    $
    Net income:Basic
    
    $
    0.46
    
    
    $
    0.26Diluted
    
    $
    0.45
    
    
    $
    0.26Weighted-average number of shares outstanding:Basic
    
    
    34,258,223
    
    
    
    28,219,926Diluted
    
    
    34,982,205
    
    
    
    28,897,621
 See accompanying notes to consolidated financial statements. 2




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UNITED AMERICA INDEMNITY, LTD. 
 Consolidated Statements of Comprehensive Income  (Unaudited)
    
    
    (Unaudited)Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004Net income
    
    $
    15,591
    
    
    $
    7,418Other comprehensive (loss) income before tax:Unrealized (losses) gains on securities:Unrealized holding (losses) gains arising during period
    
    
    (11,595
    )
    
    
    5,776Less: Reclassification adjustment for losses
included in net income
    
    
    (532
    )
    
    
    (291
    )Other comprehensive (loss) income, before tax
    
    
    (11,063
    )
    
    
    6,067Income tax (benefit) expense related to items of other
comprehensive income
    
    
    (3,491
    )
    
    
    1,725Other comprehensive (loss) income, net of tax
    
    
    (7,572
    )
    
    
    4,342Comprehensive income, net of tax
    
    $
    8,019
    
    
    $
    11,760
 See accompanying notes to consolidated financial statements. 3




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UNITED AMERICA INDEMNITY, LTD. 
 Consolidated Statements of Changes in Shareholders Equity  (Unaudited)Quarter Ended
    
    
    Year EndedMarch 31, 2005
    
    
    December 31, 2004Common shares:Number at beginning of period
    
    
    28,273,153
    
    
    
    27,802,503Class A common shares issued in merger
    
    
    7,930,536
    
    
    
    Class A common shares issued under share
incentive plans
    
    
    148,469
    
    
    
    (200
    )Class A common shares issued in IPO
    
    
    
    
    
    
    462,500Class A common shares issued to directors
    
    
    2,240
    
    
    
    8,350Number at end of period
    
    
    36,354,398
    
    
    
    28,273,153Common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Class A common shares issued
    
    
    1
    
    
    
    Balance at end of period
    
    $
    4
    
    
    $
    3Additional paid-in capital:Balance at beginning of period
    
    $
    356,725
    
    
    $
    347,487Contributed capital from common shares
    
    
    142,077
    
    
    
    7,312Other
    
    
    2,398
    
    
    
    1,926Balance at end of period
    
    $
    501,200
    
    
    $
    356,725Accumulated other comprehensive income net
of deferred income tax:Balance at beginning of period
    
    $
    15,507
    
    
    $
    10,031Other comprehensive (loss) income
    
    
    (7,572
    )
    
    
    5,476Balance at end of period
    
    $
    7,935
    
    
    $
    15,507Retained earnings:Balance at beginning of period
    
    $
    60,318
    
    
    $
    23,271Net income
    
    
    15,591
    
    
    
    37,047Balance at end of period
    
    $
    75,909
    
    
    $
    60,318Total shareholders equity
    
    $
    585,048
    
    
    $
    432,553
 See accompanying notes to consolidated financial statements. 4




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UNITED AMERICA INDEMNITY, LTD. 
 Consolidated Statements of Cash Flows  (Unaudited)
    
    
    (Unaudited)Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004Cash flows from operating activities:Net income
    
    $
    15,591
    
    
    $
    7,418Adjustments to reconcile net income to net cash
provided by (used for) operating activities:Amortization of debt issuance costs
    
    
    45
    
    
    
    45Amortization
and depreciation
    
    
    310
    
    
    
    Restricted stock expense
    
    
    980
    
    
    
    423Extraordinary gain
    
    
    (1,426
    )
    
    
    Deferred federal income taxes
    
    
    (703
    )
    
    
    (1,198
    )Amortization of bond premium and discount, net
    
    
    661
    
    
    
    760Net realized
investment losses
    
    
    616
    
    
    
    70Equity in net earnings of partnerships
    
    
    (105
    )
    
    
    (579
    )Equity in net earnings of unconsolidated subsidiaries
and minority interest
    
    
    (42
    )
    
    
    Changes in:Agents balances
    
    
    17
    
    
    
    6,140Account receivables
    
    
    16,580
    
    
    
    Reinsurance receivables
    
    
    45,221
    
    
    
    15,890Unpaid losses and loss adjustment expenses
    
    
    (26,503
    )
    
    
    (23,688
    )Unearned premiums
    
    
    4,527
    
    
    
    4,096Ceded balances payable
    
    
    (5,549
    )
    
    
    (16,056
    )Insurance premiums payable
    
    
    (19,598
    )
    
    
    Other liabilities
    
    
    (896
    )
    
    
    (6,556
    )Amounts held for the account of others
    
    
    5,709
    
    
    
    (3,135
    )Contingent commissions
    
    
    (4,303
    )
    
    
    35Federal income tax receivable
    
    
    (593
    )
    
    
    927Prepaid reinsurance premiums
    
    
    2,882
    
    
    
    9,097Deferred acquisition costs, net
    
    
    (8,827
    )
    
    
    Other  net
    
    
    (2,942
    )
    
    
    (9,508
    )Net cash provided by (used for) operating activities
    
    
    21,652
    
    
    
    (15,819
    )Cash flows from investing activities:Proceeds from sale of bonds and stocks
    
    
    93,922
    
    
    
    20,086Proceeds from maturity of bonds
    
    
    7,319
    
    
    
    5,766Proceeds from sale of other invested assets
    
    
    4,875
    
    
    
    383Purchase of bonds and stocks
    
    
    (191,377
    )
    
    
    (91,371
    )Purchase of other invested assets
    
    
    (13
    )
    
    
    (750
    )Acquisition of business, net of cash acquired
    
    
    (58,529
    )
    
    
    Net cash used for investing activities
    
    
    (143,803
    )
    
    
    (65,886
    )Cash flows from financing activities:Net proceeds from IPO of common shares
    
    
    
    
    
    
    7,312Borrowing under credit facility
    
    
    504
    
    
    
    Repayments of credit facility
    
    
    (1,148
    )
    
    
    Capital lease obligations
    
    
    (138
    )
    
    
    Change in debt
    
    
    29
    
    
    
    Net cash (used for) provided by financing activities
    
    
    (753
    )
    
    
    7,312Net change in cash and cash equivalents
    
    
    (122,904
    )
    
    
    (74,393
    )Cash and cash equivalents at beginning of period
    
    
    242,123
    
    
    
    214,796Cash and cash equivalents at end of period
    
    $
    119,219
    
    
    $
    140,403
 See accompanying notes to consolidated financial statements. 5




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UNITED AMERICA INDEMNITY, LTD. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. Principles of Consolidation and Basis of Presentation United America Indemnity, Ltd. (United America Indemnity or the Company), incorporated on
August 26, 2003, is domiciled in the Cayman Islands. On January 24, 2005, the Company changed its
name from United National Group, Ltd. to United America Indemnity, Ltd. The Companys Class A
common stock is publicly traded on the Nasdaq National Market. On March 14, 2005, the Company
changed its trading symbol on the Nasdaq National Market from UNGL to INDM. The consolidated financial statements include the accounts of United America Indemnity and its
wholly owned subsidiaries, Wind River Insurance Company (Barbados) Ltd. (Wind River Barbados),
U.A.I. (Gibraltar) Limited, U.A.I. (Luxembourg) I S.ar.l., U.A.I. (Luxembourg) II S.ar.l., U.A.I.
(Luxembourg) III S.ar.l., U.A.I. (Luxembourg) IV S.ar.l., U.A.I. (Luxembourg) Investment S.ar.l.,
Wind River (Luxembourg) S.ar.l., Wind River Insurance Company, Ltd. (Wind River Bermuda), Wind
River Services, Ltd., U.N. Holdings II, Inc., U.N. Holdings Inc., Wind River Investment
Corporation, American Insurance Service, Inc. (AIS), American Insurance Adjustment Agency, Inc.
(AIAA), International Underwriters, LLC. (IUI), United National Insurance Company (UNIC),
Penn Independent Corporation (PIC), PIC Holdings, Inc. (PIC Holdings), Residential Underwriting
Agency, Inc., Delaware Valley Underwriting Agency, Inc., DVUA Pittsburgh, Inc., DVUA Massachusetts,
Inc., DVUA of New York, Inc., DVUA of New Jersey, Inc., DVUA West Virginia, Inc., DVUA North
Carolina, Inc., DVUA of Ohio, Inc., DVUA South Carolina, Inc., DVUA Virginia, Inc., Penn Oceanic
Insurance Company, Inc., Penn Independent Financial Services, Inc., Apex Insurance, Inc., Apex
Insurance Services of Illinois, Inc., Summit Risk Services Inc., Stratus Insurance Services, Inc.,
Stratus Web Builder, Inc., Penn-America Insurance Company, Penn-Star Insurance Company, Penn
Patriot Insurance Company, Diamond State Insurance Company (Diamond State), United National
Specialty Insurance Company (United National Specialty), United National Casualty Insurance
Company (United National Casualty), J.H. Ferguson & Associates, LLC (J.H. Ferguson), Emerald
Insurance Company, and Loyalty Insurance Company. All significant intercompany balances and
transactions have been eliminated in consolidation. The consolidated financial statements as of March 31, 2005 and for the quarter ended March 31, 2005
and 2004 are unaudited, but in the opinion of management have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP) and on the same
basis as the annual audited consolidated financial statements. The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include all adjustments that are, in the opinion of
management, necessary for a fair statement of results for the interim periods. Results of
operations for the quarter ended March 31, 2005 and 2004 are not necessarily indicative of the
results of a full year. The accompanying notes to the consolidated financial statements should be
read in conjunction with the notes to the consolidated financial statements contained in the
Companys 2004 Annual Report on Form 10-K. The Companys wholly-owned business trust subsidiaries, United National Group Capital Trust I
(United National Capital Trust I), United National Group Capital Statutory Trust II (United
National Statutory Trust II), Penn-America Statutory Trust I (Penn America Statutory Trust I) and
Penn-America Statutory Trust II (Penn America Statutory Trust II), are not consolidated pursuant
to Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). The Companys business trust subsidiaries have issued $60.0 million
in floating rate capital securities (Trust Preferred Securities). The sole assets of the
Companys business trust subsidiaries are $61.9 million of junior subordinated debentures issued by the Company,
which have the same terms with respect to maturity, payments and distributions as the Trust
Preferred Securities. Certain prior period amounts have been reclassified to conform to the current period presentation. 6




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Description of Business The Company offers two general classes of insurance products. These two classes of products are
property and general liability insurance products and non-medical professional liability insurance
products. Collectively, the Companys U.S. insurance subsidiaries are licensed in all 50 states
and the District of Columbia. The Companys non-U.S. insurance subsidiaries are licensed in
Bermuda and Barbados and Wind River Bermuda is eligible to write surplus lines business in certain
U.S. jurisdictions. 2. Acquisition of Penn Independent Corporation and Merger with Penn-America Group, Inc. Through a series of transactions on January 24, 2005, the Company acquired 100% of the voting
equity interest of Penn-America Group, Inc. (together with its subsidiaries, Penn-America Group).
The Company acquired 67.3% through the merger with Penn-America Group, 30.5% through the purchase
of Penn Independent Corporation, which
held common shares of Penn-America Group, Inc., and 2.2% in two separate transactions with
individual shareholders. In connection with these transactions, the Company paid a $6.0 million
transaction fee to Fox Paine & Company. Fox Paine & Company beneficially owns shares having
approximately 85.4% of the Companys total voting power. Acquisition of Penn Independent Corporation On January 24, 2005, the Company acquired 100% of the voting equity interest of Penn Independent
Corporation (together with its subsidiaries, Penn Independent Group), a wholesale broker of
commercial insurance for small and middle market businesses, public entities, and associations,
from Penn Independent Groups shareholders for $98.5 million in cash. Penn Independent Group also
owns, through its wholly owned subsidiary PIC Holdings, 30.5% of the voting equity interest of
Penn-America Group, Inc. Upon the acquisition of Penn Independent Group, the Company also
indirectly acquired Penn Independent Groups shares of Penn-America Group, Inc. common stock. Penn
Independent Groups results of operations are included in the Companys results of operations
subsequent to the date of the acquisition. The $98.5 million purchase price, which includes transaction related expenses, was allocated to the
estimated fair values of the acquired assets and liabilities as follows (dollars in thousands): Assets:Investment in 30.5% of Penn-America Group, Inc.Class A common stock
    
    $
    65,440Other investments and cash
    
    
    23,697Premium receivable
    
    
    36,661Accrued investment income
    
    
    21Federal income taxes receivable
    
    
    1,157Intangible assets
    
    
    2,695Capital lease
    
    
    1,222Other assets
    
    
    1,899Total
    
    
    132,792Liabilities:Insurance premiums payable
    
    
    47,162Deferred federal income taxes, net
    
    
    6,853Federal income taxes payable
    
    
    224Other liabilities
    
    
    8,263Notes and loans payable
    
    
    5,703Total
    
    
    68,205Minority interest
    
    
    431Estimated fair value of net assets acquired
    
    
    64,156Purchase price
    
    
    98,540Goodwill
    
    $
    34,384
 7




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) The transaction was accounted for using the purchase method of accounting. In connection with
the acquisition of Penn Independent Group, the assets and liabilities acquired by the Company were
adjusted to estimated fair value. The $34.4 million excess of cash and acquisition costs over the
estimated fair value of assets acquired was recognized as goodwill. Acquired intangible assets of $2.7 million were as follows: January 24, 2005(Dollars in thousands)
    
    Amount
    

    Estimated Useful LifeTradenames
    
    $
    430
    
    IndefiniteAgency relationships
    
    
    1,830
    

    12 yearsCustomer contracts
    
    
    435
    

    3 years$
    2,695
 Purchases of Penn-America Group, Inc. Common Shares from Individual Shareholders On January 24, 2005, in a series of related transactions, the Company acquired all shares of
Penn-America Group, Inc. common stock owned by members of the Saltzman family, including all shares
of common stock issued upon the exercise of vested options to acquire shares of Penn-America Group,
Inc. common stock, for $13.53 a share in cash. The Saltzman family and trusts controlled by them
constituted 100% of the Penn Independent Group shareholders prior to the acquisition by United
America Indemnity. Merger with Penn-America Group, Inc. On January 24, 2005, the Company acquired 67.3% of the voting equity interest of the Penn-America
Group, Inc., a specialty property and casualty insurance holding company, for $15.3 million in cash
and approximately 7.9 million Class A common shares of United America Indemnity in a transaction
classified as a merger. Under the terms of the merger agreement, Penn-America Group, Inc.
shareholders received $15.375 of value for each share of Penn-America Group, Inc. common stock as
follows: 1) 0.7756 of a Class A common share of United America Indemnity, based on $13.875 divided
by the volume weighted average sales price of United America Indemnitys Class A common shares for
the 20 consecutive trading days ending January 21, 2005, which was $17.89, and 2) $1.50 per share
in cash. Penn-America Groups results of operations are included in the Companys results of
operations subsequent to the date of the merger. The primary reason for the merger was that the Company anticipated that it would allow United
America Indemnity to: 1) strengthen its position in the highly competitive specialty property and
casualty insurance industry; 2) achieve enhanced growth opportunities arising from a balanced
business model, improved financial flexibility, and strong cash flow; and 3) achieve a financial
base and scale capable of delivering enhanced value to customers. 8




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) In connection with the merger with Penn-America Group, Inc., the acquisition of Penn Independent
Corporation, and the transactions with individual shareholders on January 24, 2005, the $235.8
million purchase price, which includes transaction related expenses, was allocated to the estimated
fair values of the acquired assets and liabilities as follows (dollars in thousands): Assets:Investments and cash
    
    $
    431,850Agents balances
    
    
    22,881Reinsurance receivables
    
    
    43,908Accrued investment income
    
    
    3,527Prepaid reinsurance premiums
    
    
    7,259Intangible assets
    
    
    37,430Capital lease
    
    
    1,398Other assets
    
    
    767Total
    
    
    549,020Liabilities:Unpaid losses and loss adjustment expenses
    
    
    235,192Unearned premiums
    
    
    84,278Income tax payable
    
    
    810Deferred federal income taxes
    
    
    6,896Ceded balances payable
    
    
    7,329Contingent commissions
    
    
    6,787Junior subordinated debentures
    
    
    30,928Capitalized lease obligation
    
    
    1,089Other liabilities
    
    
    3,634Total
    
    
    376,943Estimated fair value of net assets acquired
    
    
    172,077Purchase price of Penn-America Group, Inc. common shares
acquired through the merger
    
    
    165,538Purchase price of Penn-America Group, Inc. common shares
acquired through Penn Independent Corporation acquisition
    
    
    65,440Purchase price of Penn-America Group, Inc. common shares
acquired from private individuals
    
    
    4,838Total purchase price
    
    
    235,816Goodwill
    
    $
    63,739
 The transaction was accounted for using the purchase method of accounting. In connection with
the merger with Penn-America Group, the assets and liabilities acquired by the Company were
adjusted to estimated fair value. The $63.7 million excess of cash, fair value of United America
Indemnitys Class A common shares exchanged, other consideration, and acquisition costs over the
estimated fair value of the net assets acquired was recognized as goodwill. Acquired intangible assets of $37.4 million were as follows: January 24, 2005(Dollars in thousands)
    
    Amount
    
    
    Estimated Useful LifeTradenames
    
    $
    16,140
    
    
    IndefiniteAgency relationships
    
    
    14,790
    
    
    12 yearsState insurance licenses
    
    
    6,000
    
    
    IndefiniteSoftware technology
    
    
    500
    
    
    3 years$
    37,430
 9




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) As mentioned in Note 10, Penn-America Group leases its home office facility in Hatboro,
Pennsylvania from Irvin Saltzman, and the lease is accounted for as a capital lease. 3. Summary of Significant Accounting Policies Investments The Companys investments in bonds are classified as available for sale and are carried at their
fair value. The difference between book value and fair value of bonds, excluding the derivative
components, net of the effect of deferred income taxes, is reflected in accumulated other
comprehensive income in shareholders equity and, accordingly, has no effect on net income other
than for impairments deemed to be other than temporary. The difference between book value and fair
value of the derivative components of the bonds is included in income. As a result of the purchase price allocation, as disclosed above in Note 2, all of Penn-Independent
Corporations and Penn-America Group, Inc.s investments at January 24, 2005 were adjusted to their
fair value on that date. Therefore, the book value of all Penn-Independent Corporations and
Penn-America Group, Inc.s investments on January 24, 2005 were adjusted to fair value
prospectively for the Company. The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security the fair value of which is below its cost. Upon identification
of such securities, a detailed review of all such securities meeting predetermined thresholds is
performed to determine whether such decline is other than temporary. If it is determined that a
decline in value is other than temporary based upon this detailed review, or if a decline in value
for an investment has persisted for 12 continuous months, or if the value of the investment has
been 20% or more below cost for six continuous months or more, or significantly declines in value
for shorter periods of time, the security is evaluated to determine whether the cost basis of the
security should be written down to its fair value. The factors considered in reaching the
conclusion that a decline below cost is other than temporary include, among others, whether the
issuer is in financial distress, the investment is secured, a significant credit rating action
occurred, scheduled interest payments were delayed or missed and changes in laws or regulations
have affected an issuer or industry. The amount of any write-down is included in earnings as a
realized loss in the period in which the impairment arose. During the quarter ended March 31, 2005, the Company recorded realized investment losses for other
than temporary impairments of $0.1 million on its common stock portfolio. There were no realized
investment losses for other than temporary impairments for the quarter ended March 31, 2004 as a
result of the Companys other than temporary impairment evaluation. Fair value is defined as the amount at which the instrument could be exchanged in a current
transaction with willing parties. The fair values of the Companys investments in bonds and stocks
are determined on the basis of quoted market prices. The Company also holds other invested assets,
including investments in several limited partnerships, which were valued at $52.1 million and $53.8
million as of March 31, 2005 and December 31, 2004, respectively. Several of these partnerships
invest solely in securities that are publicly traded and are valued at the net asset value as
reported by the investment manager. As of March 31, 2005 and December 31, 2004, the Companys
other invested assets portfolio includes $17.9 million and $20.4 million, respectively, in
securities for which there is no readily available independent market price. The estimated fair
value of such securities is determined by the general partner of each limited partnership based on
comparisons to transactions involving similar investments. Material assumptions and factors
utilized in pricing these securities include future cash flows, constant default rates, recovery
rates and any market clearing activity that may have occurred since the prior month-end pricing
period. 10




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) Derivative Instruments The Company accounts for derivative instruments under Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as
amended, which established accounting reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. As of March 31, 2005, the Company holds a single derivative instrument, an interest rate swap. In
accordance with SFAS 133, the interest rate swap is designated as a cash flow hedge, and is
recorded on the balance sheet at fair value. Changes in fair value are recorded in other
comprehensive income (loss) and are reclassified to net income when impacted by the variability of
the cash flow of the hedged item. The primary objective of the Companys interest rate swap was to hedge risk arising from interest
rate volatility related to $15.0 million of floating rate capital securities (Trust Preferred
Securities) issued by Penn-America Statutory Trust I. The Company has designated the $15.0
million of junior subordinated debentures issued by Penn-America Group, Inc. to Penn-America
Statutory Trust I as the hedged item. The junior subordinated debentures have the same terms with
respect to maturity, payment and distributions as the Trust Preferred Securities issued by
Penn-America Statutory Trust I. The Companys strategy is to convert distributions based on a
floating rate on its junior subordinated debentures with Penn-America Statutory Trust I to a
fixed-rate basis. In accordance with SFAS 133, the Company formally documents the cash flow hedging relationship
between the hedging instrument and the hedged item, the risk management objective and strategy for
undertaking the hedge, and how the effectiveness of hedging the exposure to variability in interest
rates will be assessed. At inception, the Company determined its cash flow hedge to be highly
effective in achieving offsetting cash flows attributable to the hedge risk during the term of the
hedge, as it meets the criteria for assuming no ineffectiveness, pursuant to SFAS 133. By using derivative instruments, the Company is exposed to credit risk based on current market
conditions and potential payment obligations between the Company and its counterparty. The Company
has entered into the interest rate swap with a high quality counterparty, which is rated A1 by
Moodys Investors Service Inc. (Moodys). The Companys interest rate swap contract is governed
by an International Swaps and Derivatives Association Master Agreement, and includes provisions
that require collateral to be pledged by the Company or its counterparty if the current value of
the interest rate swap exceeds certain thresholds. As of March 31, 2005, approximately $0.7
million of collateral was held by the Companys counterparty. Valuation of Accounts Receivable The Company evaluates the collectibility of premiums receivable based on a combination of factors.
In circumstances in which the Company is aware of a specific agents inability to meet its
financial obligations to the Company, a specific allowance for bad debts against amounts due is
recorded to reduce the net receivable to the amount reasonably believed to be collectible. No such
instances occurred in the quarter ended March 31, 2005. For all remaining balances, allowances are
recognized for bad debts based on historical statistics of the length of time the receivables are
past due. Goodwill and Intangible Assets Effective July 1, 2001, the Company adopted the provisions of SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). On January 24, 2005, the
Company recorded $98.1 million of goodwill as a result of the acquisition of Penn Independent
Corporation and the merger with Penn-America Group, Inc. The carrying amount of the Companys
goodwill as of March 31, 2005 was $98.1 million. 11




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) In accordance with SFAS 142, the Company is required to perform a test for impairment of goodwill
at least annually. No impairment of the goodwill was recognized for the quarter ended March 31,
2005. In accordance with SFAS 142, the Company is required to perform a test for impairment of
indefinite-lived intangible assets at least annually. No impairment of the indefinite-lived
intangible assets was recognized for the quarter ended March 31, 2005. Other intangible assets that are not deemed to have an indefinite useful life are amortized over
their useful lives. The carrying amount of intangible assets that are not deemed to have an
indefinite useful life is regularly reviewed for indicators of impairments in value in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Impairment is
recognized only if the carrying amount of the intangible asset is not recoverable from its
undiscounted cash flows and is measured as the difference between the carrying amount and the fair
value of the asset. No impairments of intangible assets that are not deemed to have indefinite
life were recognized in the quarter ended March 31, 2005. As of March 31, 2005, intangible assets are as follows: AccumulatedDescription
    
    Life
    
    Cost
    
    
    Amortization
    
    
    NetTradenames
    
    Indefinite
    
    $
    16,570
    
    
    $
    
    
    
    $
    16,570Agency relationships
    
    12 years
    
    
    16,620
    
    
    
    258
    
    
    
    16,362State insurance licenses
    
    Indefinite
    
    
    6,000
    
    
    
    
    
    
    
    6,000Software technology
    
    3 years
    
    
    500
    
    
    
    31
    
    
    
    469Customer contracts
    
    3 years
    
    
    435
    
    
    
    3
    
    
    
    432$
    40,125
    
    
    $
    292
    
    
    $
    39,833
 Capitalized Leases Fair value is based upon the present value of the underlying cash flows discounted at the Companys
incremental borrowing rate. The carrying amounts approximate fair value and are included in Other
liabilities on the balance sheet. Notes and Loans Payable Fair value is based upon the present value of the underlying cash flows discounted at the Companys
incremental borrowing rate. The carrying amounts reported in the balance sheet approximate fair
value. Premium Payables The carrying amounts reported in the balance sheet for this instrument approximate its fair value. Junior Subordinated Debentures In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, which establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity, the Companys junior
subordinated debentures are classified as a liability on the balance sheets and the related
distributions are recorded as interest expense in the Statement of Operations. 12




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)        
(Unaudited) In accordance with FIN 46, the Company is not permitted to consolidate the Companys business trust
subsidiaries, which in the aggregate issued $60.0 million of floating rate capital securities. The
sole assets of the Companys business trust subsidiaries are $61.9 million of junior subordinated
debentures issued by the Company, which have the same terms with respect to maturity, payments and
distributions as the Trust Preferred Securities. Therefore, the Companys junior subordinated
debentures are presented as a liability in the balance sheet at March 31, 2005. Revenue Recognition Premiums written are recognized as earned ratably over the terms of the respective policies. Commissions earned by the Companys agency operations are recognized based on the policy effective
date. Contingent profit commissions are based on the claims experience of the policies
underwritten for insurance companies and are recognized when received. Finance income earned by Penn Independent Financial Services, Inc., included in agency commission
and fee revenue, is recognized on the pro rata interest method over the terms of the insurance
contracts using the accrual basis. Agency Commissions and Operating Expenses Agency expenses include commissions retained by agents and producers on policies bound by the
Agency Operations. Operating expenses include personnel expenses and general operating expenses. Extraordinary Gain The extraordinary gain of $1.4 million for the quarter ended March 31, 2005 represents the
recognition of tax benefits derived from acquisition costs incurred in connection with the
Companys acquisition of Wind River Investment Corporation, which are currently considered to be
deductible for federal tax purposes. Earnings Per Share Basic earnings per share has been calculated by dividing net income available to common
shareholders by the weighted-average common shares outstanding. Diluted earnings per share has
been calculated by dividing net income available to common shareholders by the sum of the
weighted-average common shares outstanding and the weighted-average share equivalents outstanding. New Accounting Pronouncements In March 2004, the FASB issued Emerging Issues Task Force (EITF) Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments which provides new
guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue
No. 03-01 includes new disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-01;
however, the disclosure requirements remain effective and have been
adopted for the year ended
December 31, 2004. The Company will evaluate the effect, if any, of EITF 03-01 when final guidance is
released. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R), which revises
the original SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). The Company has
previously adopted the requirements of SFAS 123, which require companies to expense the estimated
fair value of employee stock options and similar awards. The accounting provisions of SFAS 123R
will be effective at the beginning of the next fiscal year beginning after December 15, 2005. The
Company is in the process of determining how the new 13




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) method of valuing stock-based compensation as prescribed in SFAS 123R will be applied to valuing
stock-based awards granted, modified or vested and the impact on compensation expense related to
such awards will have on the Companys consolidated financial statements. 4. Investments Bonds available for sale with an estimated fair market value of approximately $311.4 million and
$374.2 million, were deposited with various governmental authorities in accordance with statutory
requirements at March 31, 2005 and December 31, 2004, respectively. In addition, bonds with an
estimated fair market value of $5.4 million and $5.5 million at March 31, 2005 and December 31,
2004, respectively, were held in a trust fund to meet the regulatory requirements applicable to
Wind River Bermuda, one of the Companys subsidiaries. The cost and estimated fair value of investments classified as available for sale were as follows
as of March 31, 2005 and December 31, 2004: Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2005Bonds:Obligations of states and political subdivisions
    
    $
    417,248
    
    
    $
    6,147
    
    
    $
    (3,042
    )
    
    $
    420,353Mortgage-backed securities
    
    
    210,770
    
    
    
    178
    
    
    
    (2,538
    )
    
    
    208,410U.S. treasury and agency obligations
    
    
    208,863
    
    
    
    67
    
    
    
    (3,341
    )
    
    
    205,589Corporate notes
    
    
    205,881
    
    
    
    1,534
    
    
    
    (3,002
    )
    
    
    204,413Total bonds
    
    
    1,042,762
    
    
    
    7,926
    
    
    
    (11,923
    )
    
    
    1,038,765Common stock
    
    
    53,046
    
    
    
    4,928
    
    
    
    (1,329
    )
    
    
    56,645Preferred stock
    
    
    8,160
    
    
    
    176
    
    
    
    (280
    )
    
    
    8,056Total
    
    $
    1,103,968
    
    
    $
    13,030
    
    
    $
    (13,532
    )
    
    $
    1,103,466
 Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2004Bonds:Obligations of states and political subdivisions
    
    $
    299,525
    
    
    $
    8,700
    
    
    $
    (315
    )
    
    $
    307,910Mortgage-backed securities
    
    
    52,690
    
    
    
    456
    
    
    
    (3
    )
    
    
    53,143U.S. treasury and agency obligations
    
    
    163,108
    
    
    
    285
    
    
    
    (979
    )
    
    
    162,414Corporate notes
    
    
    59,975
    
    
    
    2,215
    
    
    
    (272
    )
    
    
    61,918Total bonds
    
    
    575,298
    
    
    
    11,656
    
    
    
    (1,569
    )
    
    
    585,385Common stock
    
    
    34,004
    
    
    
    4,338
    
    
    
    (448
    )
    
    
    37,894Preferred stock
    
    
    4,804
    
    
    
    418
    
    
    
    (110
    )
    
    
    5,112Total
    
    $
    614,106
    
    
    $
    16,412
    
    
    $
    (2,127
    )
    
    $
    628,391
 The Company held no debt or equity investments in a single issuer that was in excess of 10% of
shareholders equity at March 31, 2005 or December 31, 2004. The following table contains an analysis of the Companys securities with gross unrealized losses,
categorized by the period that the securities were in a continuous loss position as of March 31,
2005: Gross Unrealized LossesCost or
    
    
    
    
    
    
    
    
    
    
    Between(Dollars in
    
    Number of
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Six Months
    
    
    Seven Months
    
    
    Greater thanthousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    or Less
    
    
    and One Year
    
    
    One YearBonds
    
    
    417
    
    
    $
    734,234
    
    
    $
    746,157
    
    
    $
    11,923
    
    
    $
    10,212
    
    
    $
    1,390
    
    
    $
    321Preferred Stock
    
    
    12
    
    
    
    6,122
    
    
    
    6,402
    
    
    
    280
    
    
    
    280
    
    
    
    
    
    
    
    Common Stock
    
    
    68
    
    
    
    17,591
    
    
    
    18,920
    
    
    
    1,329
    
    
    
    1,037
    
    
    
    292
    
    
    
    $
    13,532
    
    
    $
    11,529
    
    
    $
    1,682
    
    
    $
    321
 14




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) Subject to the risks and uncertainties in evaluating the impairment of a securitys value, the
impairment evaluation conducted by the Company as of March 31, 2005, concluded the unrealized
losses discussed above are not other than temporary impairments. The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security with a fair value below its cost. Upon identification of such
securities, a detailed review of all such securities meeting predetermined thresholds is performed
to determine whether such decline is other than temporary. If it is determined that a decline in
value is other than temporary based upon this detailed review, or if a decline in value for an
investment has persisted for 12 continuous months, or if the value of the investment has been 20%
or more below cost for six continuous months or more, or significantly declines in value for
shorter periods of time, the security is evaluated to determine whether the cost basis of the
security should be written down to its fair value. The factors considered in reaching the
conclusion that a decline below cost is other than temporary include, among others, whether the
issuer is in financial distress, the investment is secured, a significant credit rating action
occurred, scheduled interest payments were delayed or missed and changes in laws or regulations
have affected an issuer or industry. The amount of any write-down is included in earnings as a
realized loss in the period in which the impairment arose. During the quarter ended March 31, 2005, the Company recorded other than temporary losses of $0.1
million on its common stock portfolio. There were no realized losses recorded for the quarter
ended March 31, 2004 as a result of the Companys other than temporary impairment evaluation. The amortized cost and estimated fair value of bonds classified as available for sale at March 31,
2005, by contractual maturity, are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Amortized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    42,370
    
    
    $
    42,299Due after one year through five years
    
    
    281,322
    
    
    
    277,316Due after five years through ten years
    
    
    253,333
    
    
    
    251,222Due after ten years
    
    
    254,967
    
    
    
    259,518Mortgage-backed securities
    
    
    210,770
    
    
    
    208,410$
    1,042,762
    
    
    $
    1,038,765
 There were no investments in bonds that were non-income producing for the quarters ended March
31, 2005 and 2004. 5. Reinsurance The Company cedes insurance to unrelated insurers on a pro rata and excess of loss basis in the
ordinary course of business to limit its net loss exposure. Reinsurance ceded arrangements do not
discharge the Company of primary
liability as the originating insurer. At March 31, 2005, the Company carried reinsurance receivables of $1,530.6 million. At December
31, 2004 and 2003, the Company carried reinsurance receivables of $1,531.9 million and $1,763.0
million, respectively. These amounts are net of a purchase accounting adjustment of $49.4 million
arising from (1) discounting the reinsurance receivables balances and (2) applying a risk margin to
the reinsurance receivables balance. Also, at the Wind River acquisition date, reinsurance
receivables were reduced by an estimate of uncollectible reinsurance of $49.1 million. The $49.4
million discounting/risk margin adjustment will accrete through incurred losses in the future in a
manner consistent with the related fair value adjustment for unpaid loss and loss adjustment
expenses. The $49.1 million 15




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) estimate of uncollectible reinsurance at the time of the acquisition
has been subsequently reduced to $28.8 million and $28.7 million at March 31, 2005 and December 31,
2004, respectively, primarily as a result of the commutation agreement with Trenwick America
Reinsurance Corp. recorded in 2003. At March 31, 2005 and December 31, 2004, the Company held
collateral securing its reinsurance receivables of $700.5 million and $705.6 million, respectively. Since the Wind River acquisition date, no allowance for uncollectible reinsurance has been
established since management believes its reinsurance receivables are recorded at their net
realizable amounts. The need for an allowance for uncollectible reinsurance is based on the
results of the Companys regular review of the collectibility of recorded reinsurance receivables
due from its external reinsurers. Our Non-U.S. Insurance Operations commenced offering reinsurance to Penn-America Insurance
Companies through a quota share arrangement. This reinsurance arrangement resulted in 30% of
Penn-America Insurance Companies net retained insurance liability on new and renewal business
bound after February 1, 2005 being ceded to Wind River Bermuda, an affiliated company. The agreement
also stipulates that 30% of Penn-America Insurance Companies February 1, 2005 net unearned premium
be ceded to Wind River Bermuda. 6. Income Taxes Under current Cayman Islands law, the Company is not required to pay any taxes in the Cayman
Islands on its income or capital gains. The Company has received an undertaking that, in the event
of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until
the year 2023. Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes in Bermuda on its income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed,
the Company will be exempt from taxation in Bermuda until March 2016. Under current Barbados law,
the Company and its Barbados subsidiary are not required to pay any taxes in Barbados on its income
or capital gains. The Company has received an undertaking that in the event of any taxes being
imposed, the Company will be exempted from taxation in Barbados until the year 2033. U.N. Holdings II and its respective subsidiaries are subject to income taxes imposed by U.S.
authorities and file U.S. tax returns. The Company is not subject to income taxation other than as stated above. There can be no assurance
that there will not be changes in applicable laws, regulations or treaties, which might require the
Company to change the way it operates or become subject to taxation. The weighted average expected tax provision has been calculated using income (loss) before income
taxes in each jurisdiction multiplied by that jurisdictions applicable statutory tax rate. The
Companys income before income taxes for the quarter ended March 31, 2005 of $14.1 million
represents $12.3 million from the Non-U.S. Subsidiaries and $1.8 million from the U.S.
Subsidiaries. The following table summarizes the differences between the tax provision under APB
28 for interim financial statement periods and the expected tax provision at the weighted average
tax rate: Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax IncomeExpected tax provision at
weighted average
    
    $
    631
    
    
    
    4.5
    %
    
    $
    448
    
    
    
    7.2
    %Adjustments:Tax exempt interest
    
    
    (1,253
    )
    
    
    (8.9
    )
    
    
    (1,216
    )
    
    
    (19.5
    )Dividend exclusion
    
    
    (81
    )
    
    
    (0.6
    )
    
    
    (37
    )
    
    
    (0.6
    )Non-resident withholding
    
    
    __
    
    
    
    0.0
    
    
    
    144
    
    
    
    2.3Other
    
    
    784
    
    
    
    5.6
    
    
    
    5
    
    
    
    0.0Actual Taxes
    
    $
    81
    
    
    
    0.6
    %
    
    $
    (656
    )
    
    
    (10.6
    )%
 16




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) In the quarter ended March 31, 2005, the Company recognized an extraordinary gain of $1.4
million for tax benefits derived from acquisition costs included as a reduction in equity as a
result of the Companys acquisition of Wind River Investment Corporation, that have been or will be
deducted in the future from income for federal tax purposes. 7. Liability for Unpaid Losses and Loss Adjustment Expenses Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows: Quarter Ended
    
    
    Quarter Ended(Dollars in thousands)
    
    March 31, 2005
    
    

March 31, 2004Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,876,510
    
    
    $
    2,059,760Less gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    1,531,896
    
    
    
    1,745,737Net balance at beginning of period
    
    
    344,614
    
    
    
    314,023Plus Unpaid losses and loss adjustment expenses acquired as
a result of the merger (1)
    
    
    235,192
    
    
    
    Less gross reinsurance receivables on unpaid losses and
loss adjustment expenses acquired as a result of the
merger (1)
    
    
    43,908
    
    
    
    Unpaid losses and loss adjustment expense subtotal
    
    
    535,898
    
    
    
    314,023Incurred losses and loss adjustment expenses related to:Current year
    
    
    63,597
    
    
    
    29,270Prior years
    
    
    __
    
    
    
    Total incurred losses and loss adjustment
expenses
    
    
    63,597
    
    
    
    29,270Paid losses and loss adjustment expenses related to:Current year
    
    
    2,824
    
    
    
    2,233Prior years
    
    
    37,254
    
    
    
    24,400Total paid losses and loss adjustment expenses
    
    
    40,078
    
    
    
    26,633Net balance at end of period
    
    
    559,417
    
    
    
    316,660Plus gross reinsurance receivables on unpaid losses and
loss adjustment
    
    
    1,525,782
    
    
    
    1,719,412Unpaid losses and loss adjustment expenses at end of period
    
    $
    2,085,199
    
    
    $
    2,036,072
   (1)
    
    Unpaid loss and loss adjustment expenses and gross reinsurance receivable
on unpaid losses acquired on January 24, 2005, as a result of the merger with
Penn-America Insurance Group. There was no development during the quarter ended March 31, 2005 on net losses and loss
adjustment expense incurred prior to December 31, 2004. There
were no net loss and loss adjustment expenses relating to prior
accident years for the quarters ended March 31, 2005 and 2004. In 2003, Penn-America Group received an unexpected increase in the number of new claims reported
relating to four policies issued to a single insured between January 1, 1980 and April 1, 1983.
The insured was a manufacturer of safety equipment including industrial masks and the new claims
reported allege existing and potential bodily injury due to a medical condition called silicosis.
The original policies covered products and completed operations only and were issued each with a
$500,000 indemnity policy aggregate limit of liability. At March 31, 2005, the Companys loss and
loss adjustment expense reserves included its best estimate for its ultimate obligations for these
claims based on current information. 17




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) 8. Junior Subordinated Debentures The junior subordinated debentures described below were assumed by the Company in its merger with
Penn-America Group, Inc. On May 15, 2003, Penn-America Statutory Trust II, a business trust subsidiary formed by
Penn-America Group, Inc., issued $15.0 million of floating rate Trust Preferred Securities. These
securities have a thirty-year maturity, with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions are paid
quarterly in arrears at a rate of 410 basis points over three-month
London Interbank Offered Rates.
Distributions on these securities can be deferred for up to five years, but in the event of such
deferral, the Company may not declare or pay cash dividends on its common stock. Penn-America
Group guarantees all obligations of Penn-America Statutory Trust II with respect to distributions
and payments of these securities. Proceeds from the sale of the Trust Preferred Securities of $15.0 million and $0.5 million of
floating rate capital securities issued to Penn-America Group, Inc. by Penn-America Statutory Trust
II were used to acquire $15.5 million of Floating Rate Junior Subordinated Deferrable Interest Rate
Debentures issued by Penn-America Group, Inc. These junior subordinated debentures have the same
terms with respect to maturity, payments, and distributions as the floating rate Trust Preferred
Securities issued by Penn-America Statutory Trust II. The proceeds from these junior subordinated
debentures are being used to support growth in the Companys insurance subsidiaries and for general
corporate purposes. On December 4, 2002, Penn-America Statutory Trust I, a business trust subsidiary formed by
Penn-America Group, issued $15.0 million of floating rate Trust Preferred Securities. These
securities have a thirty-year maturity, with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions are paid
quarterly in arrears at a rate of 400 basis points over three-month London Interbank Offered Rates.
Distributions on these securities can be deferred for up to five years, but in the event of such
deferral, the Company may not declare or pay cash dividends on it
common stock. Penn-America Group guarantees all obligations of Penn-America Statutory Trust I with respect to distributions and
payments of these securities. Proceeds from the sale of Trust Preferred Securities of $15.0 million and $0.5 million of floating
rate capital securities issued to Penn-America Group, Inc. by Penn-America Statutory Trust I were
used to acquire $15.5 million of Floating Rate Junior Subordinated Deferrable Interest Rate
Debentures issued by the Company. These junior subordinated debentures have the same terms with
respect to maturity, payments, and distributions as the floating rate Trust Preferred Securities
issued by Penn-America Statutory Trust I. In 2002, Penn-America Group, Inc. contributed net
proceeds of $14.5 million for these junior subordinated debentures to Penn-America Insurance
Company to support the business growth in its insurance subsidiaries. 9. Notes and Loans Payable Notes Payable Notes payable and term loans assumed through the acquisition of Penn Independent Corporation are
comprised of the following: (Dollars in thousands)
    
    
    
    
    
    March 31, 2005Bank term loan
    
    
    (1
    )
    
    $
    5Bank, line of credit
    
    
    (2
    )
    
    
    3,010$
    3,015
   (1)
    
    Term loan due in monthly principal installments of $2,595, including interest accrued
at 9%. This loan matures on May 1, 2005(2)
    
    $4,500,000 revolving line of credit which expires on November 15, 2005, bearing
interest of the banks prime rate less 1.25% payable monthly. 18




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited)  The Company has agreed to a pledge agreement granting the bank a first priority perfected
lien on a money market deposit account of United National Insurance Company at the bank.
This account shall always have on deposit the $4.5 million required by the pledge agreement.
The Company has also agreed to a security agreement granting the bank a first priority
perfected lien on its finance receivables. Interest expense resulting from the note payable and term loan was $.03 million for the
quarter ended March 31, 2005. Loans Payable Loans payable assumed through the acquisition of Penn Independent Corporation are comprised of the
following: (Dollars in thousands)
    
    
    
    
    
    March 31, 2005Loans payable, former shareholder of subsidiary
    
    
    (1
    )
    
    $
    721Loans payable, former shareholder of subsidiary
    
    
    (2
    )
    
    
    971Loans payable, vendor
    
    
    (3
    )
    
    
    10Loans payable, minority shareholder of subsidiary
    
    
    (4
    )
    
    
    293$
    1,995
   (1)
    
    Loan payable, to former shareholder of subsidiary, due in monthly principal
installments of $6,870, plus interest at a fixed rate of 4.5%. This loan matures on
December 1, 2013.(2)
    
    Loan payable, to former shareholder of subsidiary, due in monthly principal
installments of $9,242, plus interest at a fixed rate of 4.5%. This loan matures on
December 1, 2013.(3)
    
    Loan payable due to a vendor in monthly principal installments of $930. This loan is
non-interest bearing and matures on February 16, 2006. Automotive equipment is held as
collateral.(4)
    
    Loan payable, to minority shareholder of subsidiary, due in monthly principal
installments of $5,333, plus interest at a fixed rate of 4.5%. This loan matures on
September 1, 2009. Interest expense related to loans payable was $.02 million for the quarter ended March 31,
2005. 10. Related Party Transactions In connection with the merger with Penn-America Group, Inc. and the acquisition of Penn Independent
Corporation, the Company paid a $6.0 million transaction fee to Fox Paine & Company. Fox Paine &
Company beneficially owns shares having approximately 85.4% of the Companys total voting power. Penn Independent Group leases its home office facility in Hatboro, Pennsylvania from Irvin
Saltzman, father of United America Indemnitys President, Jon S. Saltzman, and a director of Penn
Independent Corporation through January 24, 2005. The lease is accounted for as a capital lease,
and management believes that the lease terms are at market rates. Penn-America Group also leases a
portion of the building in which Penn Independent Groups home office facility is located. Capital
lease obligations on these leases was $1.9 million as of March 31, 2005. In connection with the
acquisition, the Company is under a post-closing obligation to either (i) enter into a lease for
the Hatboro facility for a term of at least 10 years or (ii) purchase the Hatboro facility and
related land on terms to be agreed upon. At this time, the Company is still exploring both
options. The following describes the minority equity interests in the Penn Independent subsidiaries: On February 24, 1993, Apex Insurance Agency, Inc. issued ten shares of common stock to a minority
shareholder. As of March 31, 2005, this represented an 11.11% ownership. As of March 31, 2005, PIC
Holdings owned 88.89% of the outstanding common stock of Apex Insurance Agency, Inc. Minority
interest as of March 31, 2005 was approximately $0.3 million. Under the terms of an agreement
executed March 22, 2005, these shares were repurchased in April 2005 by Apex Insurance Agency, Inc.
in exchange for a note payable over 84 months. On December 22, 2003, Stratus Insurance Services, Inc. entered into a shareholders agreement with
two minority shareholders issuing ten shares to each shareholder. As of March 31, 2005, these
minority shareholders owned 19




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) 20.0% of the outstanding shares of Stratus Insurance Services, Inc. As
of March 31, 2005, PIC Holdings owned 80.0% of the outstanding common stock of Stratus Insurance
Services, Inc. Minority interest as of March 31, 2005 was $0.06 million. On October 15, 2004, DVUA Massachusetts, Inc. entered into a shareholders agreement with a
minority shareholder issuing twenty shares. As of March 31, 2005, the minority shareholder owned
20.0% of the outstanding shares of DVUA Massachusetts, Inc. As of March 31, 2005, PIC Holdings
owned 80.0% of the outstanding common stock of DVUA Massachusetts Agency, Inc. Minority interest
as of March 31, 2005 was $0.08 million. 11. Commitments and Contingencies Capital Leases The Company has lease agreements for the main offices of Penn-America Group, Inc. and Penn
Independent Corporation, which are accounted for as capital leases. Interest is payable at 8.5% on
the outstanding principal balance. The total of future minimum
payments under capital lease obligations is $2.8 million which
is comprised of interest of $0.9 million and the present value
of net minimum payments of $1.9 million. Property under capital leases is comprised of the following: March 31, 2005Accumulated(Dollars in thousands)
    
    Cost
    
    
    Amortization
    
    
    NetOffice facility
    
    $
    2,620
    
    
    $
    30
    
    
    $
    2,590
 Amortization of $.03 million has been recorded on property under capital leases for the
quarter ended March 31, 2005. Lease Commitments Total rental expense under operating leases for the quarters ended March 31, 2005 and 2004
aggregated $0.8 million, and $0.8 million, respectively. At March 31, 2005, future minimum
payments under non-cancelable Capital and operating leases were as follows: (Dollars in thousands)2005
    
    $
    2,9912006
    
    
    3,6112007
    
    
    2,9842008
    
    
    3,1322009 and thereafter
    
    
    11,808Total
    
    $
    24,526
 Legal Proceedings Various lawsuits against the Company have arisen in the ordinary course of the Companys business,
including defending coverage claims brought against the Company by its policyholders or others. The
Companys litigation, including coverage claims matters, is subject to many uncertainties, and
given their complexity and scope, the outcomes cannot be predicted with certainty. It is possible
that the results of operations in a particular quarterly or annual period could be materially
affected by an ultimate unfavorable outcome of litigation and/or coverage claim matters. Management
believes, however, that the ultimate outcome of all litigation and coverage claim matters after 20




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) consideration of applicable reserves should not have a material adverse effect on the Companys
financial condition. 12. Shareholders Equity In connection with the merger with Penn-America Group, Inc., the Company issued 7.9 million Class A
common shares valued at $141.9 million and issued options to purchase 0.2 million shares with a
fair value of $1.6 million in the quarter ended March 31, 2005. The Company accrued awards under
the share incentive plan of $0.2 million for restricted stock and $0.8 million for options to
purchase the Companys Class A common stock in the quarter ended March 31, 2005. 13. Compensation Plans The Company follows SFAS 123, which establishes a fair value-based method of accounting for
stock-based compensation plans. Deferred Compensation On April 6, 1992, Apex Insurance Agency, Inc. (Apex) entered into an agreement with its minority
shareholders which provides for certain payments to such shareholders based upon the appraised fair
value of the company. Vesting was conditioned upon Apex achieving certain financial benchmarks as
set forth in the agreement, with payment to be made upon the occurrence of events as specified in
the agreement. The vested value of such deferred compensation has been recorded as a liability as
of March 31, 2005. Effective December 29, 2003, deferred compensation due to one of the minority
shareholders was converted into a term loan payable. As of March 29, 2005, Apex entered into a separation agreement with the sole remaining participant
of this plan. In accordance with the terms of the plan and in connection with such separation,
Apex will pay out the balance in the plan in three annual installments, with the first installment
due April 1, 2006. Payment of such monies is conditioned on the participants ongoing compliance
with certain restrictive covenants contained in the separation agreement, including non-compete,
non-solicit and confidentiality obligations. Share Incentive Plan In September and October 2003, the Companys Board of Directors approved the Companys Share
Incentive Plan and Amendment No. 1 thereto (as so amended, the Plan). The purpose of the Plan is
to enable the Company to offer key employees stock options, restricted stock and other stock-based
awards. Under the Plan, the Company has reserved 2,500,000 Class A common shares for issuance
pursuant to awards granted under the Plan. In accordance with Penn-America Groups Stock Incentive Plan, the merger with United America
Indemnity on January 24, 2005 caused immediate vesting of all the Penn-America Groups unvested
stock options. As of January 24, 2005, Penn-America Group had 203,635 stock options outstanding,
all of which were exercisable. Each holder
of the Penn-America Group stock options received converted stock options of United America
Indemnity. In exchange for outstanding options to purchase Penn-America Group, Inc.s Class A
common shares, the Company granted 175,007 stock options at the acquisition date. See subsequent events for amendment to the Share Incentive Plan. 21




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) During the quarter ended March 31, 2005, the Company granted 30,000 Time-Based Options under the
plan. The Time-Based Options vest in 20% increments over a five-year period, with any unvested
options forfeited upon termination of employment for any reasons, and expire 10 years after grant
date. WeightedAverageNumber of
    
    
    Exercise PriceShares
    
    
    Per ShareOptions outstanding at December 31, 2004
    
    
    1,720,164
    
    
    $
    11.35Options issued
    
    
    205,007
    
    
    $
    10.65Options cancelled
    
    
    (50,141
    )
    
    $
    17.00Options exercised
    
    
    (74,365
    )
    
    $
    8.82Options outstanding at March 31, 2005
    
    
    1,800,665
    
    
    $
    12.06Options exercisable at March 31, 2005
    
    
    469,368
    
    
    $
    8.53
 The options exercisable at March 31, 2005 include the following: Number of optionsOption Price
    
    exercisable$ 5.62
    
    
    1,933$ 6.02
    
    
    486$ 6.50
    
    
    256,074$ 8.49
    
    
    76,738$10.00
    
    
    78,875$12.36
    
    
    8,594$16.00
    
    
    12,891$17.00
    
    
    33,777Options exercisable at March 31, 2005
    
    
    469,368
 During the quarter ended March 31, 2005, the Company granted an aggregate of 73,904 Class A
common shares, subject to certain restrictions, to key employees of the Company under the Plan
(Restricted Shares). Of this grant, 3,872 Restricted shares vested immediately and the remainder
vest in 20% increments over a five-year period. During the quarter ended March 31, 2005, an
aggregate of 2,240 Class A common shares with a weighted average grant date value of $18.84 per
share were granted, subject to certain restrictions, to the Board of Directors of the Company under
the plan (Director Restricted Shares). Annual Incentive Awards Plan In December 2003, the Companys Board of Directors approved an Annual Incentive Awards Plan (the
Awards Plan). The Awards Plan is administered by the compensation committee of the Companys
Board of Directors. All officers are eligible to participate in the Awards Plan, as selected by
the compensation committee. Incentive awards under the Awards Plan are determined and paid in cash based upon objective
performance-based criteria as set forth in the Awards Plan. The criteria relate to certain
performance goals, such as net income and individual performance expectations as established and
approved by the compensation committee. See subsequent events disclosed for amendments to the Annual Incentive Awards Plan. 401(k) Plans The Company maintains two 401(k) defined contribution plans covering substantially all U.S.
employees. 22




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) For our U.S. Subsidiaries, exclusive of the Penn-America Insurance Companies and the Agency
Operations, the Company matches 75% of the first 6% contributed by the employee. In addition, the
Company contributes 1% of the employees salary regardless of whether the employee contributes to
the plan. Eligible employees are vested in the Companys contribution and relative investment
income after three years of service. Total expenses related to this plan for the quarter ended
March 31, 2005 and 2004 were $0.3 million and $0.2 million, respectively. For our Penn-America Insurance Companies and Agency Operations employees, the Company matches 50%
of the first 6% contributed by the employee. Vesting is immediate for eligible employees in the
Companys contribution. Total expenses related to this plan for the quarter ended March 31, 2005
were $ 0.09 million. 14. Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares outstanding
during the period. The following table sets forth the computation of basic and diluted earnings per share. Quarter Ended
    
    
    Quarter Ended(Dollars in thousands, except per share data)
    
    March 31, 2005
    
    
    March 31, 2004Net income before extraordinary gain
    
    $
    14,165
    
    
    $
    7,418Less: Preferred stock dividends
    
    
    
    
    
    
    Income available to common shareholders before
extraordinary gain
    
    
    14,165
    
    
    
    7,418Extraordinary gain
    
    
    1,426
    
    
    
    Net income
    
    $
    15,591
    
    
    $
    7,418Basic earnings per share:Weighted average shares for basic earnings per share
    
    
    34,258,223
    
    
    
    28,219,926Net income available to common shareholders before
extraordinary gain
    
    $
    0.42
    
    
    $
    0.26Extraordinary gain
    
    
    0.04
    
    
    
    Net income
    
    $
    0.46
    
    
    $
    0.26Diluted earnings per share:Weighted average shares for diluted earnings per
share
    
    
    34,982,205
    
    
    
    28,897,621Net income available to common shareholders before
extraordinary gain
    
    $
    0.41
    
    
    $
    0.26Extraordinary gain
    
    
    0.04
    
    
    
    Net income
    
    $
    0.45
    
    
    $
    0.26
 15. Statutory Financial Information GAAP differs in certain respects from Statutory Accounting Principles (SAP) as prescribed or
permitted by the Insurance Departments. The principal differences between SAP and GAAP are as
follows:  
    Under SAP, investments in debt securities are carried at amortized cost, while under
GAAP the Company records its debt securities at estimated fair value.
    Under SAP, policy acquisition costs, such as commissions, premium taxes, fees and other
costs of underwriting policies are charged to current operations as incurred, while under
GAAP such costs are 23




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited)  deferred and amortized on a pro rata basis over the period covered by the policy.
    Under SAP, certain assets designated as Non-admitted Assets (such as prepaid expenses)
are charged against surplus.
    Under SAP, net deferred income tax assets are admitted following the application of
specified criteria, with the resulting admitted deferred tax amount being credited directly
to surplus.
    Under SAP, receivables are non-admitted and are charged against surplus based upon aging
criteria.
    Under SAP, the costs and related receivables for guaranty funds and other assessments
are recorded based on managements estimate of the ultimate liability and related
receivable settlement, while under GAAP such costs are accrued when the liability is
probable and reasonably estimable and the related receivable amount is based on future
premium collections or policy surcharges from in-force policies.
    Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported
net of the effects of reinsurance transactions, whereas under GAAP, unpaid losses and loss
adjustment expenses and unearned premiums are reported gross of reinsurance. The NAIC issues model laws and regulations, many of which have been adopted by state insurance
regulators, relating to: (a) risk-based capital (RBC) standards; (b) codification of insurance
accounting principles; (c) investment restrictions; and (d) restrictions on the ability of
insurance companies to pay dividends. The Companys U.S. insurance subsidiaries are required by law to maintain certain minimum surplus
on a statutory basis, and are subject to regulations under which payment of a dividend from
statutory surplus is restricted and may require prior approval of regulatory authorities. Applying
the current regulatory restrictions as of December 31, 2004, approximately $37.4 million is
available for distribution from the Companys U.S. insurance subsidiaries during 2005. The Company
paid no dividends during 2004 or 2003. The NAICs risk-based capital model provides a tool for insurance regulators to determine the
levels of statutory capital and surplus an insurer must maintain in relation to its insurance and
investment risks, as well as its reinsurance exposures, to assess the potential need for regulatory
attention. The model provides four levels of regulatory attention, varying with the ratio of an
insurance companys total adjusted capital to its authorized control level RBC (ACLRBC): (a) if a
companys total adjusted capital is less than or equal to 200%, but greater than 150% of its ACLRBC
(the Company Action Level), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position; (b) if a companys
total adjusted capital is less than or equal to 150%, but greater than 100% of its ACLRBC (the
Regulatory Action Level), the regulatory authority will perform a special examination of the
company and issue an order specifying the corrective actions that must be followed; (c) if a
companys total adjusted capital is less than or equal to 100%, but greater than 70% of its ACLRBC
(the Authorized Control Level), the regulatory authority may take any action it deems necessary,
including placing the company under regulatory control; and (d) if a companys total adjusted
capital is less than or equal to 70% of its ACLRBC (the Mandatory Control Level), the regulatory
authority must place the company under its control. Based on the standards currently adopted, each
of the Companys U.S. Insurance Subsidiaries capital and surplus are in excess of the prescribed
200% company action level risk-based capital requirements of $196.8 million. 24




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) The following is selected information for the Companys and the Predecessors U.S. Insurance
Subsidiaries, net of intercompany eliminations, where applicable, as determined in accordance with
SAP: Quarter Ended
    
    
    Year Ended(Dollars in thousands)
    
    March 31, 2005
    
    
    December 31, 2004Statutory capital and surplus, as of
end of period
    
    $
    521,402
    
    
    $
    373,669Statutory net income
    
    
    8,818
    
    
    
    32,701
 16. Segment Information In connection with the Companys merger with Penn-America Group and acquisition of Penn Independent
Group, the Company has reevaluated its segment classifications and determined that the Company will
operate and manage its business through two business segments during 2005 and thereafter. The
Insurance Operations segment includes the operations of our United National Insurance Companies,
Penn-America Insurance Companies and Non-U.S. Insurance Operations. The Agency Operations segment
includes the operations of Penn Independent. The segments follow the same accounting policies used for the Companys consolidated financial
statements as described in the summary of significant accounting policies. Gross premiums written by product class are as follows: Quarter Ended
    
    
    Quarter Ended(Dollars in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Property and general liability
    
    $
    116,966
    
    
    
    92,422Non-medical professional liability
    
    
    18,494
    
    
    
    25,516Total
    
    $
    135,460
    
    
    $
    117,938
 25




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) Following is a tabulation of business segment information. Corporate information is included
to reconcile segment data to the consolidated financial statements. Quarter Ended March 31, 2005:
    
    Insurance
    
    
    Agency(Dollars in thousands)
    
    Operations
    
    
    Operations
    
    
    Corporate
    
    
    TotalRevenues:Gross premiums written
    
    $
    135,460
    
    
    $
    
    
    
    $
    
    
    
    $
    135,460Net premiums written
    
    $
    109,521
    
    
    $
    
    
    
    $
    
    
    
    $
    109,521Net premiums earned
    
    $
    102,112
    
    
    $
    
    
    
    $
    
    
    
    $
    102,112Agency commission and fee revenues
    
    
    
    
    
    
    6,252
    
    
    
    
    
    
    
    6,252Net investment income
    
    
    
    
    
    
    
    
    
    
    11,868
    
    
    
    11,868Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (616
    )
    
    
    (616
    )Total revenues
    
    
    102,112
    
    
    
    6,252
    
    
    
    11,252
    
    
    
    119,616Losses and Expenses:Net losses and loss adjustment expenses
    
    
    63,597
    
    
    
    
    
    
    
    
    
    
    
    63,597Acquisition costs and other underwriting expenses
    
    
    31,115
    
    
    
    
    
    
    
    
    
    
    
    31,115Agency commission and operating expenses
    
    
    
    
    
    
    6,919
    
    
    
    
    
    
    
    6,919Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    1,966
    
    
    
    1,966Interest expense
    
    
    
    
    
    
    
    
    
    
    1,916
    
    
    
    1,916Income (loss) before income taxes
    
    $
    7,400
    
    
    $
    (667

    )
    
    $
    7,370
    
    
    
    14,103Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81Net income before minority interest and equity in net
income of partnerships
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    14,022Minority interest and equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143Net income before extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,165Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,426Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,591Total Assets
    
    $
    3,095,958
    
    
    $
    74,544

    
    
    $
    
    
    
    $
    3,170,502
 Quarter Ended March 31, 2004:
    
    Insurance
    
    
    Agency(Dollars in thousands)
    
    Operations
    
    
    Operations
    
    
    Corporate
    
    
    TotalRevenues:Gross premiums written
    
    $
    117,938
    
    
    $
    
    
    
    $
    
    
    
    $
    117,938Net premiums written
    
    $
    58,617
    
    
    $
    
    
    
    $
    
    
    
    $
    58,617Net premiums earned
    
    $
    45,422
    
    
    $
    
    
    
    $
    
    
    
    $
    45,422Agency commission and fee revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net investment income
    
    
    
    
    
    
    
    
    
    
    4,210
    
    
    
    4,210Net realized investment (losses) gains
    
    
    
    
    
    
    
    
    
    
    (70
    )
    
    
    (70
    )Total revenues
    
    
    45,422
    
    
    
    
    
    
    
    4,140
    
    
    
    49,562Losses and Expenses:Net losses and loss adjustment expenses
    
    
    29,270
    
    
    
    
    
    
    
    
    
    
    
    29,270Acquisition costs and other underwriting expenses
    
    
    11,324
    
    
    
    
    
    
    
    
    
    
    
    11,324Agency commission and operating expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    1,470
    
    
    
    1,470Interest expense
    
    
    
    
    
    
    
    
    
    
    1,315
    
    
    
    1,315Income before income taxes
    
$
    4,828
    
    
$
    
    
    
$
    1,355
    
    
    
    6,183Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (656
    )Net income before equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,839Equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,418Total Assets
    
    $
    2,625,937
    
    
    $
    

    
    
    $
    
    
    
    $
    2,625,937
 26




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) 17.
Supplemental Cash Flow Information Taxes and Interest Paid Quarter Ended
    
    
    Quarter Ended(Dollars in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Net federal income taxes paid (refunded)
    
    $
    1,380
    
    
    $
    (534
    )Interest paid
    
    
    1,081
    
    
    
    400
 Non-Cash Investing Activities The Company purchased 100% of the common shares of Penn Independent Corporation and 100% of the
common shares of Penn-America Group, Inc. In conjunction with the acquisition, liabilities were
assumed as follows: (Dollars in thousands)Fair values of assets acquired (including goodwill)
    
    $
    714,495Cash portion of purchase price
    
    
    (125,985
    )Non-cash portion of purchase price
    
    
    (142,931
    )Liabilities assumed (including minority interest)
    
    $
    445,579
 18. Subsequent Events The Board of Directors adopted the Companys Share Incentive Plan (the Share Incentive Plan) on
September 15, 2003, and Amendment No. 1 to the Share Incentive Plan on November 15, 2003. Both the
Share Incentive Plan and Amendment No. 1 were approved by a simple majority of shareholders at the
May 4, 2004 Annual General Meeting. On March 21, 2005 the
Board of Directors adopted Amendment No. 2 to the Share
Incentive Plan, subject to shareholder approval, to increase the
number of shares available under the Share Incentive Plan from
2,500,000 to 5,000,000 along with certain other technical changes to
the Share Incentive Plan. Amendment No. 2 to the Share Incentive
Plan was approved by a simple majority of shareholders at the
May 4, 2005 Annual General Meeting. At the May 4, 2005
Annual General Meeting, shareholders also approved the Amended and
Restated United America Indemnity, Ltd. Annual Incentive Awards
Program (the Amended and Restated Program). The purpose
of the Amended and Restated Program is to encourage increased
efficiency and profitability and reward employees contributions
to corporate success. The Amended and Restated Program broadens the
scope of employees eligible to receive awards and customizes
performance measures so that certain classes of employees are
eligible for awards based solely on the performance of their
subsidiary or division, as determined by the Companys
compensation committee. At the May 4, 2005
Annual General Meeting, shareholders also approved the Annual Integration Bonus Plan. The Annual Integration Bonus with respect to a given fiscal year (e.g., 2005 or 2006)
(the Bonus Determination Year) shall be equal to the product of (i) 50% of a target integration
bonus of $2.7 million and (ii) a percentage, subject to any other provisions of each eligible
executives employment agreement with Penn-America, governing such bonus (including, without
limitation, provisions regarding the payment of the bonus in shares of United America Indemnity,
Ltd.). In no instance will any payments to any single executive exceed $450,000 with respect to
any Bonus Determination Year. The Board of Directors of each executives employer will retain the
sole and exclusive authority and discretion to administer and interpret the terms of the
arrangement with respect to each such executive, including with limitation, the determination of
whether the targeted pretax income and other objectives have been 27




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UNITED AMERICA INDEMNITY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited) satisfied, and its determination and judgment shall be made in good faith. 28




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and accompanying notes of United
America Indemnity included elsewhere in this report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report, including information with respect
to our plans and strategy, constitutes forward-looking statements that involve risks and
uncertainties. Please see Cautionary Note Regarding Forward-Looking Statements for a discussion
of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained herein. For more information
regarding our business and operations, please see our Annual Report on Form 10-K for the year ended
December 31, 2004. Recent Developments On January 24, 2005, we completed our merger with Penn-America Group, Inc. (Penn-America), as
well as our acquisition of Penn Independent Corporation (Penn Independent). In connection with
the transactions, our shareholders approved a change in our name from United National Group, Ltd.
to United America Indemnity, Ltd. As a result of the transactions, we are one of the leading specialty property and casualty insurers
in the industry, as well as a significant originator of and placement agent for specialty property
and casualty insurance coverage. Under our ownership structure, each company will retain its
existing corporate identity and the businesses of United America Indemnity, Penn-America and Penn
Independent will continue to be operated by essentially the existing management teams. Under the terms of the merger agreement, Penn-Americas shareholders received $15.375 of value for
each share of Penn-America common stock as follows: 1) 0.7756 of a Class A common share of United
America Indemnity, based on $13.875 divided by the volume weighted average sales price of United
America Indemnitys Class A common shares for the 20 consecutive trading days ending January 21,
2005, which was $17.89, and 2) $1.50 in cash. At a Penn-America special meeting of shareholders held on January 24, 2005, Penn-Americas
shareholders of record as of December 15, 2004 approved, among other things, the merger
transaction; and at the United America Indemnity extraordinary general meeting of shareholders held
on January 24, 2005, United America Indemnity shareholders of record as of December 15, 2004
approved, among other things, the issuance of United America Indemnity Class A common shares to
Penn-Americas shareholders in the merger and to change the name of United National Group, Ltd. to
United America Indemnity, Ltd. Under purchase accounting rules, our results of operations for the quarter ended March 31, 2005
reflect the addition of Penn-America and Penn Independent from January 25, 2005 through March 31,
2005. All prior period results reflect only the results of operations of United America Indemnity. On February 7, 2005, Edward J. Noonan, a current board member and former chairman of the audit
committee of United America Indemnity, was appointed as the Acting Chief Executive Officer of
United America Indemnity, following the departure of our former chief executive officer, David R.
Bradley. On March 14, 2005, we changed our trading symbol on the Nasdaq National Market from UNGL to
INDM. Overview In connection with our merger with Penn-America and our acquisition of Penn Independent, we have
reevaluated our segment classifications and determined that we will operate and manage our business
through two business segments during 2005 and thereafter. Our Insurance Operations segment
includes the operations of our United National Insurance Companies, Penn-America Insurance
Companies and Non-U.S. Insurance Operations. Our Agency Operations segment includes the operations
of Penn Independent. Our Insurance Operations segment offers two general classes of insurance products, property and
general liability 29




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##### Table of Contents



insurance products and non-medical professional liability insurance products. Our insurance
products target very specific, defined, homogenous groups of insureds with customized coverages to
meet their needs. Our products include customized guidelines, rates and forms tailored to our risk
and underwriting philosophy. We distribute our insurance products through a group of 135 professional general agencies,
including our wholly owned subsidiary J.H. Ferguson, that have limited quoting and binding
authority, and that in turn sell our insurance products to insureds through retail insurance
brokers. We derive our revenues primarily from premiums paid on insurance policies that we write,
commissions, service fees and finance income of our Agency Operations and from income generated by
our investment portfolio, net of fees paid for investment management and investment accounting
services. The amount of insurance premiums that we receive is a function of the amount and type of
policies we write, as well as of prevailing market prices. Our expenses include losses and loss adjustment expenses, acquisition costs and other underwriting
expenses, other operating expenses and interest and other investment expenses. Losses and loss
adjustment expenses are estimated by management and reflect our best estimate of ultimate losses
and costs arising during the reporting period and revisions of prior period estimates. We record
losses and loss adjustment expenses based on an actuarial analysis of the estimated losses we
expect to be reported on insurance policies written. The ultimate losses and loss adjustment
expenses will depend on the actual costs to resolve claims. Acquisition expenses consist
principally of commissions that are typically a percentage of the premiums on insurance policies
written, net of ceding commissions earned from reinsurers. Other underwriting expenses consist
primarily of personnel expenses and general operating expenses. Agency commissions and operating
expenses include commissions retained by agents and producers on policies bound by our Agency
Operations Other agency operating expenses include personnel expenses and general operating
expenses. Corporate and other operating expenses are comprised primarily of management fees paid
to affiliates. Interest expense consists of interest paid on funds held on behalf of others,
senior notes payable to related parties and junior subordinated debentures. In managing the business and evaluating performance, the management focuses on measures such as
loss ratio, expense ratio, combined ratio and net operating income, which we define as net income
excluding after-tax realized investment gains (losses) and extraordinary items that do not reflect
overall operating trends. Our management focuses on net operating income as a useful measure of
the net income attributable to the ongoing operations of the business. Net operating income is not
a substitute for the net income determined in accordance with GAAP, and investors should not place
undue reliance on this measure. Critical Accounting Policies and Estimates Investments Fair values The carrying amount for our investments approximates their estimated fair value. We measure the
fair value of investments in our fixed income and equity portfolios based upon quoted market
prices. We also hold other invested assets, including investments in several limited partnerships,
which were valued at $52.1 million as of March 31, 2005. Several of the limited partnerships invest
solely in securities that are publicly traded and are valued at the net asset value as reported by
the investment manager. As of March 31, 2005, our other invested assets portfolio included $17.9
million in securities for which there is no readily available independent market price. The
estimated fair value of such securities is determined by the general partner of each limited
partnership based on comparisons to transactions involving similar investments. Material
assumptions and factors utilized in pricing these securities include future cash flows, constant
default rates, recovery rates and any market clearing activity that may have occurred since the
prior month-end pricing period. Classification of Investments Investments in bonds, preferred stock and common stock have been designated as available for sale,
and any change 30




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]

in market value will be included in other comprehensive income in our shareholders equity and,
accordingly, have no effect on net income except for investment market declines deemed to be other
than temporary. Other Than Temporary Impairment We regularly perform various analytical procedures with respect to our investments, including
identifying any security with a fair value below its cost. Upon identification of such securities,
we perform a detailed review of all such securities meeting predetermined thresholds, to determine
whether such decline is other than temporary. If we determine a decline in value to be other than
temporary based upon this detailed review, or if a decline in value for an investment has persisted
for 12 continuous months, or if the value of the investment has been 20% or more below cost for six
continuous months or more, or significantly declines in value for shorter periods of time, we
evaluate the security to determine whether the cost basis of the security should be written down to
its fair value. The factors we consider in reaching the conclusion that a decline below cost is
other than temporary include, among others, whether the issuer is in financial distress, the
investment is secured, a significant credit rating action occurred, scheduled interest payments
were delayed or missed and changes in laws or regulations have affected an issuer or industry. We
include the amount of any write-down in earnings as a realized loss in the period in which the
impairment arose. The following table contains an analysis of our securities with gross unrealized losses,
categorized by the period that the securities were in a continuous loss position as of March 31,
2005: Gross Unrealized LossesCost or
    
    
    
    
    
    
    
    
    
    
    Between(Dollars in
    
    Number of
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Six Months
    
    
    Seven Months
    
    
    Greater thanthousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    or Less
    
    
    and One Year
    
    
    One YearBonds
    
    
    417
    
    
    $
    734,234
    
    
    $
    746,157
    
    
    $
    11,923
    
    
    $
    10,212
    
    
    $
    1,390
    
    
    $
    321Preferred Stock
    
    
    12
    
    
    
    6,122
    
    
    
    6,402
    
    
    
    280
    
    
    
    280
    
    
    
    
    
    
    
    Common Stock
    
    
    68
    
    
    
    17,591
    
    
    
    18,920
    
    
    
    1,329
    
    
    
    1,037
    
    
    
    292
    
    
    
    $
    13,532
    
    
    $
    11,529
    
    
    $
    1,682
    
    
    $
    321
 Subject to the risks and uncertainties in evaluating the impairment of a securitys value, the
impairment evaluation conducted by us as of March 31, 2005, concluded the unrealized losses
discussed above are not other than temporary impairments. Goodwill and Intangible Assets Effective July 1, 2001, we adopted the provisions of SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142). On January 24, 2005, we recorded
$98.1 million of goodwill as a result of the acquisition of Penn Independent Corporation and the
merger with Penn-America Group, Inc. The carrying amount of our goodwill as of March 31, 2005 was
$98.1 million. In accordance with SFAS 142, we are required to perform a test for impairment of goodwill at least
annually. No impairment of the goodwill was recognized for the quarter ended March 31, 2005. In accordance with SFAS 142, we are required to perform a test for impairment of indefinite-lived
intangible assets at least annually. No impairment of the indefinite-lived intangible assets was
recognized for the quarter ended March 31, 2005. Other intangible assets that are not deemed to have an indefinite useful life are amortized over
their useful lives. The carrying amount of intangible assets that are not deemed to have an
indefinite useful life is regularly reviewed for indicators of impairments in value in accordance
with SFAS 144. Impairment is recognized only if the carrying amount of the intangible asset is not
recoverable form its undiscounted cash flows and is measured as the difference between the carrying
amount and the fair value of the asset. No impairments of intangible assets were recognized in the
quarter ended March 31, 2005. 31




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Liability For Unpaid Losses And Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses reflects our best estimate for future
amounts needed to pay losses and related adjustment expenses and the impact of our reinsurance
coverages with respect to insured events. The process of establishing the liability for property
and casualty unpaid losses and loss adjustment expenses is a complex process, requiring the use of
informed estimates and judgments. This liability includes an amount determined on the basis of
claim adjusters evaluations with respect to insured events that occurred and an amount for losses
incurred that have not been reported to us. In some cases, significant periods of time, up to
several years or more, may elapse between the occurrence of an insured loss and the reporting of
the loss to us. The method for determining our liability for unpaid losses and loss adjustment expenses includes,
among other things, reviewing past loss experience and considering other factors such as legal,
social and economic developments. We regularly review and update the methods of making such
estimates and establishing the resulting liabilities and we make any resulting adjustment in the
accounting period in which the adjustment arose. In 2003, the Penn-America received an unexpected increase in the number of new claims reported
relating to four policies issued to a single insured between January 1, 1980 and April 1, 1983.
The insured was a manufacturer of safety equipment including industrial masks and the new claims
reported allege existing and potential bodily injury due to a medical condition called silicosis.
The original policies covered products and completed operations only and were issued each with a
$500,000 indemnity policy aggregate limit of liability. At March 31, 2005, the Companys loss and
loss adjustment expense reserves included its best estimate for its ultimate obligations for these
claims based on current information. Recoverability of Reinsurance Receivables We regularly review the collectibility of our reinsurance receivables, and we include adjustments
resulting from this review in earnings in the period in which the adjustment arises. At March 31, 2005 and December 31, 2004, we carried reinsurance receivables of $1,530.6 million and
$1,531.9 million, respectively. These amounts are net of a purchase accounting adjustment of $49.4
million arising from (1) discounting the reinsurance receivables balances and (2) applying a risk
margin to the reinsurance receivables balance. Also, at the Wind River acquisition date,
reinsurance receivables were reduced by an estimate of uncollectible reinsurance of $49.1 million.
The $49.4 million discounting/risk margin adjustment will accrete through incurred losses in the
future in a manner consistent with the related fair value adjustment for unpaid loss and loss
adjustment expenses. The $49.1 million estimate of uncollectible reinsurance at the time of the
acquisition has been subsequently reduced to $28.8 million and $28.7 million at March 31, 2005 and
December 31, 2004, respectively, primarily as a result of the commutation agreement with Trenwick
America Reinsurance Corp. recorded in 2003. At March 31, 2005 and December 31, 2004, we held
$700.5 million and $705.6 million, respectively, of collateral securing our reinsurance
receivables. As of March 31, 2005 and December 31, 2004, we also had $47.0 million and $42.6
million, respectively, of prepaid reinsurance premiums. 32




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##### Table of Contents



The following table sets forth United America Indemnitys ten largest reinsurers, as of March
31, 2005. Also shown are the amounts of premiums written ceded by us to these reinsurers during
the quarter ended March 31, 2005. A.M.
    
    Gross
    
    
    Prepaid
    
    
    Total
    
    
    
    
    
    
    CededBest
    
    Reinsurance
    
    
    Reinsurance
    
    
    Reinsurance
    
    
    Percent of
    
    
    Premiums
    
    
    Percent of(Dollars in millions)
    
    Rating
    
    Receivables
    
    
    Premium
    
    
    Assets
    
    
    Total
    
    
    Written
    
    
    TotalAmerican Re-Insurance Co.
    
    A
    
    $
    668.1
    
    
    $
    19.7
    
    
    $
    687.8
    
    
    
    41.5
    %
    
    $
    10.8
    
    
    
    41.8
    %Employers Reinsurance Corp.
    
    A
    
    
    334.4
    
    
    
    13.6
    
    
    
    347.9
    
    
    
    21.0
    
    
    
    6.3
    
    
    
    24.2Hartford Fire Insurance Co.
    
    A+
    
    
    92.1
    
    
    
    
    
    
    
    92.1
    
    
    
    5.5
    
    
    
    0.1
    
    
    
    0.5General Reinsurance Corp.
    
    A++
    
    
    82.3
    
    
    
    5.7
    
    
    
    88.0
    
    
    
    5.3
    
    
    
    2.5
    
    
    
    9.6GE Reinsurance Corporation
    
    A
    
    
    68.2
    
    
    
    0.1
    
    
    
    68.4
    
    
    
    4.1
    
    
    
    0.2
    
    
    
    0.6Generali  Assicurazioni
    
    A+
    
    
    49.3
    
    
    
    
    
    
    
    49.3
    
    
    
    3.0
    
    
    
    
    
    
    
    Converium AG
    
    B++
    
    
    46.3
    
    
    
    
    
    
    
    46.3
    
    
    
    2.8
    
    
    
    (0.2
    )
    
    
    (0.6
    )Converium Re (North America)
    
    B-
    
    
    36.5
    
    
    
    0.1
    
    
    
    36.6
    
    
    
    2.2
    
    
    
    0.1
    
    
    
    0.3Swiss Reinsurance America Corp
    
    A+
    
    
    29.4
    
    
    
    
    
    
    
    29.4
    
    
    
    1.8
    
    
    
    
    
    
    
    (0.1
    )Clearwater Insurance (Odyssey
Reinsurance Corp.)
    
    A
    
    
    24.2
    
    
    
    
    
    
    
    24.2
    
    
    
    1.4
    
    
    
    
    
    
    
    Subtotal
    
    
    
    
    1,430.8
    
    
    
    39.2
    
    
    
    1,470.0
    
    
    
    88.6
    
    
    
    19.8
    
    
    
    76.3All other reinsurers
    
    
    
    
    177.7
    
    
    
    11.1
    
    
    
    188.8
    
    
    
    11.4
    
    
    
    6.1
    
    
    
    23.7Total reinsurance
receivables before purchase
accounting adjustments
    
    
    
    
    1,608.5
    
    
    
    50.3
    
    
    
    1,658.8
    
    
    
    100.0
    %
    
    $
    25.9
    
    
    
    100.0
    %Purchase accounting adjustments
    
    
    
    
    (78.0
    )
    
    
    (3.3
    )
    
    
    (81.3
    )Total receivables
    
    
    
    
    1,530.5
    
    
    $
    47.0
    
    
    
    1,577.5Collateral from reinsurers
    
    
    
    
    (700.5
    )
    
    
    
    
    
    
    (700.5
    )Net receivables
    
    
    
    $
    830.0
    
    
    
    
    
    
    $
    877.0
 The $700.5 million of collateral from reinsurers includes $46.2 million for reinsurance
receivable from Converium AG and $36.6 million for reinsurance receivable from Converium (North
America) at March 31, 2005. For the quarters ended March 31, 2005 and 2004, the Company incurred
trust maintenance fees of $0.8 million and $0.4 million, respectively. The trust maintenance fees
are included in net investment income. Deferred Acquisition Costs Our cost of acquiring new and renewal insurance and reinsurance contracts is capitalized as
deferred acquisition costs and amortized over the period in which the related premiums are earned.
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions,
premium taxes and certain other costs, which are directly related to and vary with the production
of business. The method followed in computing such amounts limits them to their estimated
realizable value, which gives effect to the premium to be earned, related investment income, losses
and loss adjustment expenses and certain other costs expected to be incurred as the premium is
earned. The amortization of deferred acquisition costs was $21.9 million and $26.2 million for the
quarters ended March 31, 2005 and 2004, respectively. Realizability of Deferred Tax Assets We provide for income taxes in accordance with the provisions of SFASNo. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized consistent with the asset and
liability method required by SFAS 109. Our deferred tax assets and liabilities primarily result
from temporary differences between the amounts recorded in our consolidated financial statements
and the tax basis of our assets and liabilities. At each balance sheet date, management assesses the need to establish a valuation allowance that
reduces deferred tax assets when it is more likely than not at all, or some portion, of the
deferred tax assets will not be realized. The valuation allowance is based on all available
information including projections of future taxable income from each tax-paying component in each
jurisdiction, principally derived from business plans and available tax planning strategies.
Projections of future taxable income incorporate several assumptions of future business and
operations that are apt to differ from actual experience. If, in the future, our assumptions and
estimates that resulted in our 33




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forecast of future taxable income for each tax-paying component
prove to be incorrect, an additional valuation
allowance could become necessary. This could have a material adverse effect on our financial
condition, results of operations, and liquidity. Stock Based Compensation The Company accounts for stock-based compensation in accordance with SFAS 123, Accounting for
Stock-Based Compensation, which establishes a fair value-based method of accounting for
stock-based compensation plans. Revenue Recognition Premiums written are recognized as earned ratably over the terms of the respective policies. Commissions earned by our agency operations are recognized based on the policy effective date.
Contingent profit commissions are based on the claims experience of the policies underwritten for
insurance companies and are recognized when received. Finance income earned by Penn Independent Financial Services, Inc., included in agency commission
and fee revenue, is recognized on the pro rata interest method over the terms of the insurance
contracts using the accrual basis. New Accounting Pronouncements In March 2004, the Financial Accounting Standards Board (the FASB) issued Emerging Issues Task
Force (EITF) Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments which provides new guidance for assessing impairment losses on debt and
equity investments. Additionally, EITF Issue No. 03-01 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-01; however, the disclosure requirements remain
effective and have been adopted for our year ended December 31, 2004. We will evaluate the effect,
if any, of EITF 03-01 when final guidance is released. In December 2004, the FASB issued SFAS 123R, Share-Based Payment, which revises the original SFAS
123. The Company has previously adopted the requirements of SFAS 123, which requires companies to
expense the estimated fair value of employee stock options and similar awards. The accounting
provisions of SFAS 123R will be effective at the beginning of the fiscal year beginning after
December 15, 2005. We are in the process of determining how the new method of valuing stock-based
compensation as prescribed in SFAS 123R will be applied to valuing stock-based awards granted,
modified or vested and the impact on compensation expense related to such awards will have on our
financial statements. 34




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Our Business Segments We evaluate segment performance based on gross and net premiums written, net premiums earned and
net losses and loss adjustment expenses. The following table sets forth an analysis of financial
data for our segments during the periods indicated: Quarter Ended March 31.(Dollars in thousands)
    
    2005
    
    
    2004Insurance Operations premiums written:Gross premiums written
    
    $
    135,460
    
    
    $
    117,938Ceded premiums written
    
    
    25,939
    
    
    
    59,321Net premiums written
    
    $
    109,521
    
    
    $
    58,617Revenues:Insurance Operations
    
    $
    102,112
    
    
    $
    45,422Agency Operations
    
    
    6,252
    
    
    
    Corporate
    
    
    11,252
    
    
    
    4,140Total Revenues
    
    $
    119,616
    
    
    $
    49,562Expenses:Insurance Operations
    
    $
    94,712
    
    
    $
    40,594Agency Operations
    
    
    6,919
    
    
    
    Corporate
    
    
    3,882
    
    
    
    2,785Net expenses
    
    $
    105,513
    
    
    $
    43,379Insurance Operations expense ratios:Net losses and loss adjustment expense ratio
    
    
    62.3
    %
    
    
    64.4
    %Other underwriting expense ratio
    
    
    30.5
    %
    
    
    25.0
    %Combined ratio
    
    
    92.8
    %
    
    
    89.4
    %
 Results of Operations Quarter Ended March 31, 2005 Compared with the Quarter Ended March 31, 2004 Premiums Gross premiums written, which represent the amount received or to be received for insurance
policies written without reduction for acquisition costs, reinsurance costs or other deductions,
were $135.5 million for the quarter ended March 31, 2005, compared with $117.9 million for the
first quarter of 2004, an increase of $17.6 million or 14.9%. A breakdown of gross premiums
written by product class is as follows:  
    Property and general liability gross premiums written were $117.0 million for the
quarter ended March 31, 2005, compared with $92.4 million for the first quarter of 2004, an
increase of $24.6 million or 26.6%. This increase primarily resulted from the merger with
Penn-America partially offset by the termination of several heavily reinsured products.
    Non-medical professional liability gross premiums written were $18.5 million for the
quarter ended March 31, 2005, compared with $25.5 million for the first quarter of 2004, a
decrease of $7.0 million or 27.5%. This decrease primarily resulted from underwriting and
pricing actions in response to market conditions. Net premiums written, which equal gross premiums written less ceded premiums written, were $109.5
million for the quarter ended March 31, 2005, compared with $58.6 million for the quarter ended
March 31, 2004, an increase of $50.9 million or 86.8%. The ratio of net premiums written to gross
premiums written was 80.9% for the quarter ended March 31, 2005 and 49.7% for the first quarter of
2004. A breakdown of net premiums written by product class is as follows:  
    Property and general liability net premiums written were $93.9 million for the quarter
ended March 31, 2005, compared with $48.4 million for the quarter ended March 31, 2004, an
increase of $45.5 million or 35




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94.1%. This increase primarily resulted from the merger with
Penn-America and reduced reinsurance
cessions.
    Non-medical professional liability net premiums written were $15.7 million for the
quarter ended March 31, 2005, compared with $10.3 million for the quarter ended March 31,
2004, an increase of $5.4 million or 52.8%. This increase primarily resulted from the
restructuring of reinsurance treaties, which resulted in the purchase of less reinsurance. Net premiums earned were $102.1 million for the quarter ended March 31, 2005, compared with $45.4
million for the quarter March 31, 2004, an increase of $56.7 million or 124.8%. Agency Commission and Fee Revenues Agency commission and fee revenues are generated by Penn Independent and our agency operations
segment and were $6.3 million for the quarter ended March 31, 2005. Penn Independent is a leading
U.S. wholesale broker of commercial insurance for small and middle-market businesses, public
entities and associations. Penn Independent specializes in the placement of complex and unique
property, casualty and liability insurance including professional liability, property, medical
malpractice and transportation coverages. The majority of Penn Independents business is written
on an excess and surplus lines basis. Additionally, Penn Independent provides claims
administration services for policies written by professional liability providers and premium
financing for insureds of property and casualty agents. Prior to the acquisition of Penn
Independent, we had no agency commission and fee revenues. Net Investment Income Gross investment income, excluding realized gains and losses, was $13.3 million for the quarter
ended March 31, 2005, compared with $5.1 million for the quarter ended March 31, 2004, an increase
of $8.2 million or 161.5%. The increase was primarily due to an increase in income related to
limited partnership investments and additional investment income in the first quarter of 2005 from
Penn-America. Cash and invested assets grew to $1,274.7 million as of March 31, 2005, from $924.3
million as of December 31, 2004, an increase of $350.4 million. The average duration of our fixed income investments approximated 4.0 years as of March 31, 2005,
compared with 2.7 years as of March 31, 2004. Our book yield on our fixed income investments was
3.83% at March 31, 2005, compared with 2.91% at March 31, 2004. Investment expenses were $1.4 million for the quarter ended March 31, 2005, compared with $0.9
million for the quarter ended March 31, 2004, an increase of $0.5 million or 63.3%. The increase
was largely due to an increase in fees. Net Realized Investment Gains (Losses) Net realized investment losses were $0.6 million for the quarter ended March 31, 2005, compared
with $0.1 million of net realized investment losses for the quarter ended March 31, 2004. The net
realized investment losses for the quarter ended March 31, 2005 consist of net losses of $0.6
million relative to our convertible equity and convertible bond portfolios. The net realized
investment losses in the quarter ended March 31, 2004 consist of net gains of $0.3 million relative
to our equity portfolio and net losses of $0.4 million relative to convertible bond and convertible
equity portfolios. Net Losses and Loss Adjustment Expenses Net losses and loss adjustment expenses were $63.6 million for the quarter ended March 31, 2005,
compared with $29.3 million for the quarter ended March 31, 2004, an increase of $34.3 million or
117.3%. The loss ratio for the quarter ended March 31, 2005 was 62.3% compared with 64.4% for the
quarter ended March 31, 2004. The loss ratio is calculated by dividing net losses and loss
adjustment expenses by net premiums earned. Excluding the impact of purchase accounting
adjustments, the loss ratio for the quarter ended March 31, 2005 was 58.4% compared with 60.6% for
the quarter ended March 31, 2004. The improvement in the loss ratio was primarily 36




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attributable to
the termination of products that did not meet our profitability targets in 2003. Acquisition Costs and Other Underwriting Expenses Acquisition costs and other underwriting expenses were $31.1 million for the quarter ended March
31, 2005, compared with $11.3 million for the quarter ended March 31, 2004, an increase of $19.8
million. This increase can be primarily attributed to a $13.9 million increase in acquisition
costs and $5.9 million increase in other underwriting expenses. The $13.9 million increase in acquisition costs was primarily the result of a decrease in ceding
commissions, a decrease in the deferral of acquisition costs and additional costs in the first
quarter of 2005 from Penn-America. The $5.9 million increase in other underwriting expenses was
primarily due to additional costs in the first quarter of 2005 from Penn-America and an increase in
costs from our Non-U.S. Insurance Operations. Agency Commission and Operating Expenses Agency commission and operating expenses are generated by our agency operations segment and were
$6.9 million for the quarter ended March 31, 2005. Prior to the acquisition of Penn Independent,
we had no agency commission and operating expenses. Corporate and Other Operating Expenses Corporate and other operating expenses consist of legal, consulting, management fees and taxes
incurred which are not related to operations. Corporate and other operating expenses were $2.0
million for the quarter ended March 31, 2005, compared with $1.5 million for the quarter ended
March 31, 2004, an increase of $0.5 million. Expense and Combined Ratios Our expense ratio, which is calculated by dividing the sum of acquisition costs and other
underwriting expenses by premiums earned, was 30.5% for the quarter ended March 31, 2005, compared
with 25.0% for the quarter ended March 31, 2004. Excluding the impact of purchase accounting
adjustments, the expense ratio for the quarter ended March 31, 2005 was 34.6% compared with 28.3%
for the quarter ended March 31, 2004. The expense ratio for the first quarter of 2005 was impacted
by the changes in acquisition costs and other underwriting expenses described above. Our combined ratio was 92.8% for the quarter ended March 31, 2005, compared with 89.4% for the
quarter ended March 31, 2004. Excluding the impact of purchase accounting adjustments, the
combined ratio for the quarter ended March 31, 2005 was 93.0% compared with 88.9% for the quarter
ended March 31, 2004. The combined ratio for the first quarter of 2004 reflects the income
statement benefits of ceding commissions received relating to heavily reinsured programs that have
since been terminated. Interest Expense Interest expense was $1.9 million for the quarter ended March 31, 2005, compared with $1.3 million
for the quarter ended March 31, 2004, an increase of $0.6 million. This increase is primarily due
to additional interest expense, which resulted from the merger with Penn-America and the
acquisition of Penn Independent. Income Tax Expense (Benefit) Income tax expense was $0.1 million for the quarter ended March 31, 2005, compared with $0.7
million of tax benefit for the quarter ended March 31, 2004. The change in income tax expense was
primarily attributable to additional income from Penn-America and Penn Independent, offset by an
increase in federal tax deductions for interest on notes payable to our Non-U.S. Subsidiaries of
$1.2 million as a result of the merger with Penn-America and the acquisition of Penn Independent
and an increase in tax on capital losses. Our effective tax rate for the quarter ended March 31,
2005 was 0.6%, compared with an effective tax benefit of 10.6% for the quarter ended 37




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##### Table of Contents



March 31,
2004. The effective rates differed from the 4.5% weighted average expected rate due in part to
investments in tax-exempt securities. We have an alternative minimum tax credit carryover of $12.3
million which, subject to statutory limitations, can be carried forward indefinitely. We are
limited by Internal Revenue Code
section 383 on the amount of our income that can be offset by an alternative minimum tax carryover
following the acquisition of Penn Independent and merger with Penn-America. The section 383
limitation is an amount equal to the value of the purchase price of the acquisition of Penn
Independent and merger with Penn-America less stock redemptions multiplied by the long-term
tax-exempt rate. The limitation applies until the carryforward is fully utilized. The income
limitation as a result of the acquisition of Penn Independent and merger with Penn-America is $8.3
million per year. Equity in Net Earnings of Partnerships Equity in net earnings of partnerships was $0.1 million for the quarter ended March 31, 2005,
compared with $0.6 million for the quarter ended March 31, 2004, a decrease of $0.5 million. The
decrease is primarily attributable to the performance of a limited partnership investment which
invests mainly in convertible bonds and equities. Extraordinary Gain The extraordinary gain of $1.4 million for the quarter ended March 31, 2005 represents the
recognition of tax benefits derived from acquisition costs incurred in connection with our
acquisition of Wind River Investment Corporation in 2003, which are currently considered to be
deductible for federal tax purposes. Net Income and Net Operating Income The factors described above resulted in net income of $15.6 million for the quarter ended March 31,
2005, compared to net income of $7.4 million for the quarter ended March 31, 2004, an increase of
$8.2 million or 110.2%. Net operating income was $14.5 million for the quarter ended March 31,
2005, compared with net operating income of $7.5 million for quarter ended March 31, 2005, an
increase of $7.0 million or 94.8%. Net operating income for 2005 is equal to 2005 net income less
$0.3 million for after-tax realized investment losses and $1.4 million for an extraordinary gain
recorded in connection with the acquisition of Wind River Investment Corporation. Net operating
income for 2004 is equal to 2004 net income less $0.1 million for after-tax realized investment
losses. Liquidity and Capital Resources Sources and Uses of Funds United America Indemnity is a holding company. Its principal asset is its ownership of the shares
of its direct and indirect subsidiaries, including United National Insurance Company, Diamond State
Insurance Company, United National Specialty Insurance Company, United National Casualty Insurance
Company, Wind River Barbados, Wind River Bermuda, Penn-America Insurance Company, Penn-Star
Insurance Company, and Penn-Patriot Insurance Company. United America Indemnitys principal source of cash to meet short-term and long-term liquidity
needs, including the payment of dividends to stockholders and corporate expenses, includes
dividends and other permitted disbursements from Wind River Barbados, which in turn is largely
dependent on dividends and other payments from Wind River Bermuda, the United National Insurance
Companies, and the Penn-America Insurance Companies. United America Indemnity has no planned
capital expenditures that could have a material impact on its long-term liquidity needs. The principal sources of funds at Wind River Barbados, Wind River Bermuda and the U.S. Insurance
Operations include underwriting operations, investment income and proceeds from sales and
redemptions of investments. Funds are used by Wind River Barbados, Wind River Bermuda and the U.S.
Insurance Operations principally to pay claims and operating expenses, to purchase investments and
to make dividend payments. United America Indemnitys future liquidity is dependent on the ability
of Wind River Barbados, Wind River Bermuda and the U.S. Insurance Operations to pay dividends. 38




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The United National Insurance Companies and the Penn-America Insurance Companies are restricted by
statute as to the amount of dividends that they may pay without the prior approval of regulatory
authorities. The United National Insurance Companies and the Penn-America Insurance Companies may
pay dividends without advance
regulatory approval only out of unassigned surplus. For 2005, the maximum amount of distributions
that could be paid by the United National Insurance Companies as dividends under applicable laws
and regulations without regulatory approval is approximately $37.4 million. For 2005, the maximum
amount of distributions that could be paid by the Penn-America Insurance Companies as dividends
under applicable laws and regulations without regulatory approval is approximately $14.0 million,
including $4.6 million that would be distributed to United National Insurance Company or its
subsidiary Penn Independent Corporation based on the March 31, 2005 ownership percentages. Surplus Levels Each company in our U.S. Insurance Operations is required by law to maintain a certain minimum
level of policyholders surplus on a statutory basis. Policyholders surplus is calculated by
subtracting total liabilities from total assets. The NAIC adopted risk-based capital standards
designed to identify property and casualty insurers that may be inadequately capitalized based on
inherent risks of each insurers assets and liabilities and mix of net premiums written. Insurers
falling below a calculated threshold may be subject to varying degrees of regulatory action. Based
on the standards currently adopted, each company in our U.S. Insurance Operations capital and
surplus are in excess of the prescribed minimum company action level risk-based capital
requirements. Cash Flows Sources of operating funds consist primarily of net premiums written and investment income. Funds
are used primarily to pay claims and operating expenses and to purchase investments. Our reconciliation of net income to cash provided from operations is generally influenced by the
following:  
    the fact that we collect premiums in advance of losses paid;
    the timing of our settlements with our reinsurers; and
    the timing of our loss payments. Net cash was provided by (used for) operating activities for the three months ended March 31, 2005
and 2004 of $21.7 million and $(15.8) million, respectively. Net income before extraordinary gain
for the three months ended March 31, 2005 increased by $6.7 million from the same period in 2004.
As a result, we were able to realize an increase in cash flows of approximately $37.5 million
primarily as a result of the following items: 1) a decrease in gross premiums collected of $2.2
million, offset by a decrease in reinsurance premiums paid of $55.4 million; 2) an increase in
gross losses of $32.9 million offset, by an increase in ceded losses of $23.9 million; and 3) an
increase in agency commission and operating expense of $6.9 million. Net cash was used for investing activities for the three months ended March 31, 2005 and 2004 of
$143.8 million and $65.9 million, respectively. The increase in cash used for the three months
ended March 31, 2005 from the three months ended March 31, 2004 was primarily due to the following
items: 1) an additional $100.0 million of purchases of bonds and stocks during the current year; 2)
$126.0 million of cash used for the acquisition of Penn-Independent Corporation and Penn-America
Group, Inc., net of $67.5 million of cash acquired; and 3) an additional $73.8 million of proceeds
from the sale of bonds and stocks in the current year. Net cash was (used for) provided by financing activities for the three months ended March 31, 2005
and 2004 of $(0.8) million and $7.3 million, respectively. The use of the cash flow for the three
months ended March 31, 2005 was primarily due to the repayment of a credit facility of $1.1
million. The source of the cash flow in 2004 was the issuance of 462,500 Class A common shares at
a price of $17.00 per share in January 2004, in connection with exercise by the underwriters of the
remaining overallotment option related to our initial public offering. Proceeds to 39




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United America
Indemnity, net of underwriting discounts of $0.5 million, were $7.3 million. Liquidity Each company in our U.S. Insurance Operations and our Non-U.S. Insurance Operations maintains
sufficient
liquidity to pay claims through cash generated by operations and investments in liquid investments.
At March 31, 2005, United America Indemnity had cash and cash equivalents of $119.2 million. The United National Insurance Companies participate in an intercompany pooling arrangement whereby
premiums, losses, and expenses are shared pro rata among the members of the group. United National
Insurance Company is not an authorized reinsurer in all states. As a result, any losses and
unearned premium that are ceded to United National Insurance Company by the other companies in the
group must be collateralized. The state insurance departments that regulate the parties to the
intercompany pooling agreements require United National Insurance Company to place assets on
deposit subject to trust agreements for the protection of other group members. There are two intercompany pooling agreements in place for the United National Insurance Companies.
The first pooling agreement governs policies that were written prior to July 1, 2002. The second
pooling agreement governs policies that are written on or after July 1, 2002. The method by which
intercompany reinsurance is ceded is different for each pool. In the first pool, the United
National Insurance Companies cede all business to United National Insurance Company. United
National Insurance Company cedes in turn to external reinsurers. The remaining net premiums
retained are allocated to the companies in the group according to their respective pool
participation percentages. In the second pool, each company in the group first cedes to external
reinsurers. The remaining net is ceded to United National Insurance Company where the net premiums
written of the group are pooled and reallocated to the group based on their respective
participation percentages. The second pool requires less trust funding by United National
Insurance Company as a result of it assuming less business from the other group members. United
National Insurance Company only has to fund the portion that is ceded to it after cessions have
occurred with external reinsurers. United National Insurance Company retains 80.0% of the risk
associated with each pool. To cover the required minimum exposure as of March 31, 2005, the trusts
were funded to approximately $311.4 million. It is anticipated that the required funding amount
will decline in future periods, which would improve the overall liquidity of the domestic insurance
group. The Penn-America Insurance Companies participate in an intercompany pooling arrangement whereby
premiums, losses, and expenses are shared pro rata among the members of the group. Penn-Star
Insurance Company is not an authorized reinsurer in all states. As a result, any losses and
unearned premium that are ceded to Penn-Star Insurance Company by the other group members must be
collateralized. The state insurance departments that regulate the parties to the intercompany
pooling agreements require Penn-Star Insurance Company to place assets on deposit subject to trust
agreements for the protection of other group members. The United National Insurance Companies have entered into a quota share arrangement with Wind River
Barbados and Wind River Bermuda. This reinsurance arrangement resulted in 45% and 15% of our net
retained insurance liability on new and renewal business bound January 1, 2004 through April 30,
2004 being ceded to Wind River Barbados and Wind River Bermuda, respectively. The agreement also
stipulates that 45% and 15% of the United National Insurance Companies December 31, 2003 net
unearned premium be ceded to Wind River Barbados and Wind River Bermuda, respectively. The quota share arrangement was modified as of May 1, 2004. The new arrangement stipulates that
60% of the United National Insurance Companies net retained insurance liability on new and renewal
business bound May 1, 2004 and later be ceded to Wind River Bermuda. The modified arrangement also
stipulates that 60% of the United National Insurance Companies April 30, 2004 unearned premium be
ceded to Wind River Bermuda. Also, as a result of the modification, none of the net retained
liability on new and renewal business bound May 1, 2004 and later by the United National Insurance
Companies has been assumed by Wind River Barbados. Reinsurance premiums ceded by the United National Insurance Companies through January 2005 were
paid to Wind River Bermuda and Wind River Barbados. Since Wind River Barbados and Wind River
Bermuda are not authorized reinsurers in the United States, the insurance laws and regulations of
Pennsylvania, Indiana and Wisconsin require 40




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the establishment of reinsurance trusts for the benefit
of the United National Insurance Companies. The funding requirement includes the amount due on
ceded paid loss and loss adjustment expenses, ceded unearned premium reserves, and ceded loss and
loss adjustment reserves. Wind River Bermuda and Wind River Barbados have each established
independent reinsurance trust accounts for the benefit of each of the U.S. Insurance Subsidiaries
in the amount of $143.9 million and $19.4 million, respectively, at March 31, 2005. We invest the
funds in securities that
have durations that closely match the expected duration of the liabilities assumed. We believe
that each of Wind River Bermuda and Wind River Barbados will have sufficient liquidity to pay
claims prospectively. The Penn-America Insurance Companies have entered into a quota share arrangement with Wind River
Bermuda. This reinsurance arrangement resulted in 30% of the Penn-America Insurance Companies net
retained insurance liability on new and renewal business bound after February 1, 2005 and later being
ceded to Wind River Bermuda. This agreement also stipulates that 30% of Penn-America Insurance
Companies February 1, 2005 net unearned premium be ceded to Wind River Bermuda. As a result of the cessions to our Non-U.S. Insurance Operations, we expect that in 2005 our U.S.
Insurance Operations will have less positive cash flow from operations and our Non-U.S. Insurance
Operations will have positive cash flow. This trend may continue for several years after 2005. As
mentioned above, we believe our U.S. Insurance Operations have sufficient liquidity to pay claims.
We expect our overall cash flow to remain positive. We monitor our portfolios to assure liability
and investment durations are closely matched. Prospectively, as fixed income investments mature and new cash is obtained, the cash available to
invest will be invested in accordance with our investment policy. Our investment policy allows us
to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private
equity investments. With respect to bonds, the maximum exposure per issuer varies as a function of
the quality of the security. The allocation between taxable and tax-exempt bonds is determined
based on market conditions and tax considerations, including the applicability of the alternative
minimum tax. The maximum allowable investment in equity securities under our investment policy is
based on a percentage of our capital and surplus. Capital Resources We do not anticipate paying any cash dividends on any of our common shares in the foreseeable
future. We currently intend to retain any future earnings to fund the development and growth of our
business. As a result of our acquisition of Wind River Investment Corporation, senior notes in an aggregate
principal amount of $72.8 million, subject to adjustment, were issued to the Ball family trusts, by
our subsidiary, Wind River Investment Corporation, as part of the purchase price, which senior
notes we have fully and unconditionally guaranteed. These senior notes were amended and restated
on November 24, 2003, and have an interest rate of 5.0%, which may be paid either in cash or in
kind. These senior notes mature on September 5, 2015; however, in certain circumstances, Wind
River Investment Corporation is required to make mandatory prepayments on these senior notes on
October 1 of each year. Wind River Investment Corporation is only required to make such mandatory
prepayments if we have generated excess cash flow for the preceding fiscal year. Excess cash
flow generally means an amount equal to our consolidated net income, less such amounts as our
Board of Directors may determine are necessary to: (1) maintain an A.M. Best rating of at least A
(Excellent) for each of the United National Insurance Companies; (2) make permitted dividend
payments; (3) maintain the statutory surplus of the United National Insurance Companies at
acceptable levels and (4) provide our U.S. Insurance Operations with adequate levels of working
capital. Under the terms of the senior notes, the earliest prepayment date is October 1, 2005 with
the Board of Directors determination of excess cash flow being based on our 2004 results of
operations and financial position at the time of the payment. The Board has not yet determined if
excess cash flow was generated in 2004. For 2005, the maximum amount of distributions that could be paid by the United National Insurance
Companies as dividends under applicable laws and regulations without regulatory approval is
approximately $37.4 million. For 2005, the maximum amount of distributions that could be paid by
the Penn-America Insurance Companies as dividends under applicable laws and regulations without
regulatory approval is approximately $14.0 million, including $4.6 million that would be
distributed to United National Insurance Company or its subsidiary Penn 41




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##### Table of Contents



Independent Corporation
based on the January 24, 2005 ownership percentages. UAI Luxembourg Investment holds promissory notes of $175.0 million and $110.0 million from U.N.
Holdings II, Inc., which have interest rates of 6.64% and 6.20%, respectively, and mature in 2018
and 2020, respectively. The $110.0 million note was issued on January 24, 2005. It is anticipated
that interest on both notes will be paid yearly. U.N. Holdings II, Inc. has no operations. The
ability of U.N. Holdings II, Inc. to generate cash to repay the notes is
dependent on dividends that it receives from its subsidiaries. On September 30, 2003, AIS, a wholly owned indirect subsidiary of United America Indemnity, sold
$10.0 million (aggregate liquidation amount) of floating rate trust preferred securities to Dekania
CDO I, Ltd., an exempted company incorporated with limited liability under the law of the Cayman
Islands, in a private placement through AIS wholly owned statutory trust, Trust I. AIS, through Trust I, together with other insurance companies and insurance holding companies,
issued trust preferred securities to the collateralized debt obligation pool organized by Dekania
Capital Management LLC, which in turn, issued its securities to institutional and accredited
investors. Trust I issued 10,000 trust preferred securities, having a stated liquidation amount of
$1,000 per security, that mature on September 30, 2033 and bear a floating interest rate, reset
quarterly, equal to the London Interbank Offered Rate (LIBOR) plus 4.05%. AIS, through Trust I,
has the right to call the trust preferred securities at par after September 30, 2008, five years
from the date of issuance. The entire proceeds from the sale of the trust preferred securities, including the proceeds from
the sale of common securities of Trust I to AIS, were used to fund the purchase of $10.3 million
(in principal amount) of junior subordinated deferrable interest notes issued by AIS under an
indenture, dated as of September 30, 2003, between AIS and JPMorgan Chase Bank, as trustee. On October 29, 2003, AIS sold $20.0 million (aggregate liquidation amount) of floating rate trust
preferred securities to I-Preferred Term Securities III, Ltd., an exempted company incorporated
with limited liability under the law of the Cayman Islands, in a private placement through AIS
wholly owned statutory trust, Trust II. AIS, through Trust II, together with other insurance companies and insurance holding companies,
issued trust preferred securities to the collateralized debt obligation pool organized by
I-Preferred Term Securities III, Ltd., which in turn, issued its securities to institutional and
accredited investors. Trust II issued 20,000 trust preferred securities, having a stated
liquidation amount of $1,000 per security, that mature on October 29, 2033 and bear a floating
interest rate, reset quarterly, equal to the LIBOR plus 3.85%. AIS, through Trust II, has the right
to call the trust preferred securities at par after October 29, 2008, five years from the date of
issuance. The entire proceeds from the sale of the trust preferred securities, including the proceeds from
the sale of common securities of Trust II to AIS, were used to fund the purchase of $20.6 million
(in principal amount) of floating rate junior subordinated deferrable interest debentures issued by
AIS under an indenture, dated as of October 29, 2003, between AIS and U.S. Bank National
Association, as trustee. On May 15, 2003, Penn-America Statutory Trust II, a business trust subsidiary formed by
Penn-America Group, Inc., issued $15.0 million of floating rate Trust Preferred Securities. These
securities have a thirty-year maturity, with a provision that allows us to call these securities at
par after five years from the date of issuance. Cash distributions are paid quarterly in arrears
at a rate of 410 basis points over three-month London Interbank Offered Rates (LIBOR).
Distributions of these securities can be deferred for up to five years, but in the event of such
deferral, we may not declare or pay cash dividends on our common stock. We guarantee all
obligations of Penn-America Statutory Trust II with respect to distributions and payments of these
securities. Proceeds from the sale of these securities by Penn-America Statutory Trust II were used to acquire
$15.0 million of Floating Rate Junior Subordinated Deferrable Interest Rate Debentures issued by
Penn-America Group, Inc. These junior subordinated debentures have the same terms with respect to
maturity, payments, and distributions as the floating rate Trust Preferred Securities issued by
Penn-America Statutory Trust II. The proceeds from these junior subordinated debentures will be
used to support growth in our insurance subsidiaries and for general corporate 42




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##### Table of Contents



purposes. On December 4, 2002, Penn-America Statutory Trust I, a business trust subsidiary formed by
Penn-America Group, Inc., issued $15.0 million of floating rate Trust Preferred Securities. These
securities have a thirty-year maturity, with a provision that allows us to call these securities at
par after five years from the date of issuance. Cash distributions are paid quarterly in arrears
at a rate of 400 basis points over three-month LIBOR. Distributions on these securities can be
deferred for up to five years, but in the event of such deferral, we may not declare or pay cash
dividends on our common stock. Penn-America Group, Inc. guarantees all obligations of Penn-America
Statutory Trust I with respect to distributions and payments of these securities. Proceeds from the sale of these securities by Penn-America Statutory Trust I were used to acquire
$15.0 million of Floating Rate Junior Subordinated Deferrable Interest Rate Debentures issued by
Penn-America Group, Inc. These junior subordinated debentures have the same terms with respect to
maturity, payments, and distributions as the floating rate Trust Preferred Securities issued by
Penn-America Statutory Trust I. In 2002, Penn-America Group contributed net proceeds of $14.5
million for these junior subordinated debentures to Penn-America Insurance Company to support the
business growth in its insurance subsidiaries. On September 5, 2003, we began paying annual management fees of $1.5 million in the aggregate to
Fox Paine & Company and The AMC Group, L.P. Commitments We have commitments in the form of operating leases, obligations to fund limited partnerships,
revolving line of credit senior notes payable, junior subordinated debentures and unpaid losses and
loss expense obligations. As of March 31, 2005, contractual obligations related to United America
Indemnitys commitments were as follows: Payment Due by PeriodSubsequent(Dollars in thousands)
    
    Total
    
    
    2005
    
    
    2006 - 2007
    
    
    2008 - 2009
    
    
    To 2009Capital leases (1)
    
    $
    2,804
    
    
    $
    411
    
    
    $
    1,096
    
    
    $
    1,096
    
    
    $
    201Operating leases (2)
    
    
    21,722
    
    
    
    2,580
    
    
    
    5,499
    
    
    
    4,861
    
    
    
    8,782Commitments to fund limited partnerships 3)
    
    
    4,742
    
    
    
    4,742
    
    
    
    
    
    
    
    
    
    
    
    Discretionary demand line of credit (4)
    
    
    124
    
    
    
    31
    
    
    
    62
    
    
    
    31
    
    
    
    Senior notes payable to related party (5)
    
    
    111,705
    
    
    
    3,343
    
    
    
    7,285
    
    
    
    7,285
    
    
    
    93,792Junior subordinated debentures (6)
    
    
    151,546
    
    
    
    3,642
    
    
    
    8,471
    
    
    
    8,471
    
    
    
    130,962Revolving line of credit
    
    
    3,112
    
    
    
    3,112
    
    
    
    
    
    
    
    
    
    
    
    Term Loans
    
    
    2,452
    
    
    
    272
    
    
    
    658
    
    
    
    597
    
    
    
    925Unpaid losses and loss adjustment expenses obligations (7)
    
    
    2,085,199
    
    
    
    513,857
    
    
    
    688,267
    
    
    
    360,591
    
    
    
    522,484Total
    
    $
    2,383,406
    
    
    $
    531,990
    
    
    $
    711,338
    
    
    $
    382,932
    
    
    $
    757,146
   (1)
    Penn Independent Group leases its home office facility in Hatboro, Pennsylvania from Irvin
Saltzman, father of United America Indemnitys President, Jon S. Saltzman, and a director of
Penn Independent Corporation through January 24, 2005. The lease is accounted for as a
capital lease, and management believes that the lease terms are at market rates. Penn-America
Group also leases a portion of the building in which Penn Independent Groups home office
facility is located. In connection with the acquisition, we are under a post-closing
obligation to either (i) enter into a lease for the Hatboro facility for a term of at least 10
years or (ii) purchase the Hatboro facility and related land on terms to be agreed upon. At
this time, we are still exploring both options.  (2)
    We lease office space and equipment as part of our normal operations. The amounts shown
above represent future commitments under such operating leases.  (3)
    We are required to commit additional capital to certain limited partnership investments
during future periods. Because the timing of the payments is not specified by the limited
partnership agreements, all such commitments are treated as current obligations for the
purpose of this table.  (4)
    There were no outstanding borrowings against the discretionary demand line of credit as of
December 31, 2004. The amounts shown above represent fees due on the amount available for
borrowing.  (5)
    As a result of the acquisition of Wind River Investment Corporation, senior notes in an
aggregate principal amount of approximately $72.8 million, subject to adjustment, were issued
to the Ball family trusts, as part of the purchase price by Wind River Investment Corporation,
which senior notes we have fully and unconditionally guaranteed. These senior notes were
amended and restated effective November 24, 2003, and have an interest rate of 5.0%, which may
be paid either in cash or in kind. These senior notes mature on September 5, 2015; 43




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however,
in certain circumstances Wind River Investment Corporation is required to make mandatory
prepayments on these senior notes on October 1 of each year until maturity. Wind River
Investment Corporation is required to make such mandatory prepayments if excess cash flow,
as defined, was generated in the preceding fiscal year. Excess cash flow generally means an
amount equal to our consolidated net income, less such amounts as our Board of Directors may
determine are necessary to: (1) maintain an A.M. Best rating of at least A (Excellent) for
each of the United National Insurance Companies; (2) make permitted dividend payments; (3)
maintain the statutory surplus of the United National Insurance Companies at acceptable
levels; and (4) provide our U.S. Insurance Operations with adequate levels of working capital.
Under the terms of the senior notes, the earliest prepayment date is October 1, 2005 with the
Board of Directors determination of excess cash flow being based on our 2004 results of
operations and financial position at the time of the payment. The Board has not yet
determined if excess cash flow was generated in 2004.(6)
    See discussion in Capital Resources.(7)
    See discussion in Liability for Unpaid Losses and Loss Adjustment Expenses. Off Balance Sheet Arrangements We have no off balance sheet arrangements. Inflation Property and casualty insurance premiums are established before we know the amount of losses and
loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to
anticipate the potential impact of inflation in establishing our reserves. Substantial future increases in inflation could result in future increases in interest rates, which
in turn are likely to result in a decline in the market value of the investment portfolio and
resulting unrealized losses or reductions in shareholders equity. Cautionary Note Regarding Forward-Looking Statements Some of the statements under Managements Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report may include forward-looking statements that
reflect our current views with respect to future events and financial performance that are intended
to be covered by the safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical
facts. These statements can be identified by the use of forward-looking terminology such as
believe, expect, may, will, should, project, plan, seek, intend, or anticipate
or the negative thereof or comparable terminology, and include discussions of strategy, financial
projections and estimates and their underlying assumptions, statements regarding plans, objectives,
expectations or consequences of the transactions, and statements about the future performance,
operations, products and services of the companies. Our business and operations are and will be subject to a variety of risks, uncertainties and other
factors. Consequently, actual results and experience may materially differ from those contained in
any forward-looking statements. Such risks, uncertainties and other factors that could cause
actual results and experience to differ from those projected include, but are not limited to, the
following: (1) the ineffectiveness of our business strategy due to changes in current or future
market conditions; (2) the effects of competitors pricing policies, and of changes in laws and
regulations on competition, including industry consolidation and development of competing financial
products; (3) greater frequency or severity of claims and loss activity than our underwriting,
reserving or investment practices have anticipated; (4) decreased level of demand for our insurance
products or increased competition due to an increase in capacity of property and casualty insurers;
(5) risks inherent in establishing loss and loss adjustment expense reserves; (6) uncertainties
relating to the financial ratings of our insurance subsidiaries; (7) uncertainties arising from the
cyclical nature of our business; (8) changes in our relationships with, and the capacity of, our
general agents; (9) the risk that our reinsurers may not be able to fulfill obligations; and (10)
uncertainties relating to governmental and regulatory policies. The foregoing review of important factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2004, including those under Business-Risk Factors in
our Annual Report on Form 10-K. We 44




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undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future developments or
otherwise. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We believe that we are principally exposed to two types of market risk:, interest rate risk and
credit risk, which are discussed separately below. Interest Rate Risk Our primary market risk exposure is to changes in interest rates. Our fixed income investments are
exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market
valuation of these securities. As interest rates rise, the market value of our fixed income
investments fall, and the converse is also true. We expect to manage interest rate risk through an
active portfolio management strategy that involves the selection, by our managers, of investments
with appropriate characteristics, such as duration, yield, currency and liquidity, that are
tailored to the anticipated cash outflow characteristics of our liabilities. Our strategy for
managing interest rate risk also includes maintaining a high quality portfolio with a relatively
short duration to reduce the effect of interest rate changes on book value. A significant portion
of our investment portfolio matures each year, allowing for reinvestment at current market rates. As of March 31, 2005, assuming identical shifts in interest rates for securities of all maturities,
the table below illustrates the sensitivity of market value in United America Indemnitys bonds to
selected hypothetical changes in basis point increases and decreases: Change in(Dollars in thousands)
    
    
    
    
    
    Market ValueBasis Point Change
    
    Market Value
    
    
    $
    
    
    %(200)
    
    $
    1,083,888
    
    
    $
    74,947
    
    
    
    7.4
    %(100)
    
    
    1,047,687
    
    
    
    38,746
    
    
    
    3.8No change
    
    
    1,008,941
    
    
    
    
    
    
    
    100
    
    
    950,123
    
    
    
    (58,818
    )
    
    
    (5.8
    )200
    
    
    943,962
    
    
    
    (64,979
    )
    
    
    (6.4
    )
 Credit Risk We have exposure to credit risk primarily as a holder of fixed income investments. Our investment
policy requires that we invest in debt instruments of high credit quality issuers and limits the
amount of credit exposure to any one issuer based upon the rating of the security. In addition, we have credit risk exposure to our general agencies and reinsurers. We seek to
mitigate and control our risks to producers by typically requiring our general agencies to render
payments within no more than 45 days after the month in which a policy is effective and including
provisions within our general agency contracts that allow us to terminate a general agencies
authority in the event of non-payment. With respect to our credit exposure to reinsurers, we seek to mitigate and control our risk by
ceding business to only those reinsurers having adequate financial strength and sufficient capital
to fund their obligation. In addition, we seek to mitigate credit risk to reinsurers through the
use of trusts for collateral. As of March 31, 2005, $700.5 million of collateral was held in trust
to support the reinsurance receivables. 45




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##### Table of Contents



Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), our
chief executive officer and chief financial officer have concluded that as of March 31, 2005, our
disclosure controls and procedures were designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and are operating in an effective manner. Changes in Internal Controls On January 24, 2005, the Company completed its merger with Penn-America and the acquisition of Penn
Independent. We continue to integrate the disclosure and financial reporting processes and related
internal controls relating to these entities. Other than the impact of the merger with
Penn-America and the acquisition of Penn Independent, there have been no changes in our internal
controls over financial reporting that occurred during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 46




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##### Table of Contents



PART II-OTHER INFORMATION 
 Item 1. Legal Proceedings We are, from time to time, involved in various legal proceedings in the ordinary course of
business, including litigation regarding claims. We do not believe that the resolution of any
currently pending legal proceedings, either individually or taken as a whole, will have a material
adverse effect on our business, results of operations or financial condition. With respect to our
reinsurance relationships, there is a greater potential for disputes with reinsurers who are in a
runoff of their reinsurance operations. Some of our reinsurers are in a runoff of their
reinsurance operations, and therefore, we closely monitor those relationships. We anticipate that,
similar to the rest of the insurance and reinsurance industry, we will continue to be subject to
litigation and arbitration proceedings in the ordinary course of business. 
 Item 4. Submission of Matters to a Vote of Security Holders The Company held an extraordinary general meeting of shareholders on January 24, 2005 (the
Extraordinary Meeting). At the Extraordinary Meeting, the following matters were voted upon by
the Companys shareholders: 1. To approve the issuance of Class A common shares pursuant to the Agreement and Plan of Merger
by and among the Company, U.N. Holdings II, Inc., Cheltenham Acquisition Corp. and Penn-America
Group, Inc. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes139,210,854
    
    
    3,950
    
    
    
    1,200
    
    
    
    1,190,988
 2. To approve the change of name of the Company from United National Group, Ltd. to United America
Indemnity, Ltd. and the corresponding amendment to the Companys memorandum and articles of
association. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes140,401,392
    
    
    3,700
    
    
    
    1,900
    
    
    
    0
 3. To approve by special resolution amendments to articles 135 and 136 of the Companys articles
of association. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes140,381,036
    
    
    23,606
    
    
    
    2,350
    
    
    
    0
 4A. To approve amendments to paragraph 19 of the by-laws of Wind River Insurance Company
(Barbados) Ltd. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes140,381,536
    
    
    23,606
    
    
    
    1,850
    
    
    
    0
 4B. To approve amendments to bye-laws 135 and 136 of the bye-laws of Wind River Insurance Company,
Ltd. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes140,381,486
    
    
    23,356
    
    
    
    2,150
    
    
    
    0
 4C. To approve amendments to bye-laws 135 and 136 of the bye-laws of Wind River Services, Ltd. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes140,381,236
    
    
    23,606
    
    
    
    2,150
    
    
    
    0
 47




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5. To approve the adjournment or postponement of the Extraordinary Meeting, if necessary, to
solicit additional proxies if there were not sufficient votes for proposal 1, 2, 3, 4A, 4B or 4C. Votes For
    
    Votes Against
    
    
    Votes Abstained
    
    
    Broker Non Votes136,460,290
    
    
    3,418,552
    
    
    
    528,150
    
    
    
    0
 
 Item 6 Exhibits  10.1
    Chief Executive Officer Agreement, dated March 11, 2005, by and between the
Company and Edward J. Noonan (incorporated herein by reference to Exhibit 10.1 of our
Current Report on Form 8-K dated March 17, 2005).10.2
    Amended and Restated Executive Employment Agreement, dated January 1, 2005, between
United National Insurance Company and Richard S. March (incorporated herein by reference to
Exhibit 10.1 of our Current Report on Form 8-K dated April 12, 2005).10.3
    Amended and Restated Executive Agreement, dated January 1, 2005, between United
National Insurance Company and Kevin L. Tate (incorporated herein by reference to Exhibit
10.2 of our Current Report on Form 8-K dated April 12, 2005).31.1+
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + Filed herewith. 48




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED AMERICA INDEMNITY, LTD.
RegistrantMay 10, 2005
    
    By:
    
    /s/ Edward J. NoonanDate: May 10, 2005
    
    Edward J. NoonanActing Chief Executive OfficerMay 10, 2005
    
    By:
    
    /s/ Kevin L. TateDate: May 10, 2005
    
    Kevin L. Tate
 49